Explain the characteristics MPT. Big answer
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Answer:
Modern portfolio theory assumes that every investor wants to achieve the highest possible long-term returns without taking extreme levels of short-term market risk. However, risk and reward are positively correlated in investing, so if you opt for low-risk investments, such as bonds or cash, you can expect lower returns.1
Conversely, you'll need to invest in riskier, more volatile investments like stocks to receive higher returns. However, depending on your comfort level with risk, you may not be willing to take the gamble and put your money into those investments.
The way to overcome this dilemma, MPT proposes, is through diversification, which refers to the spread of money across different asset classes and investments.
According to MPT, an investor can hold a particular asset type or investment that is high in risk individually, but, when combined with several others of different types, the whole portfolio can be balanced in such a way that its risk is lower than the individual risk of underlying assets or investments.
Instead of holding only risky stocks, for example, or only low-return bonds, an investor would buy and hold a mixture of both to ensure the maximum possible return over time.
Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to maximize expected return based on a given level of market risk. Harry Markowitz pioneered this theory in his paper "Portfolio Selection," which was published in the Journal of Finance in 1952.MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns