Concept
The fundamental concept behind MPT is that the assets in an investment portfolio should not be selected individually, each on their own merits. Rather, it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price.
Investing is a tradeoff between risk and expected return. In general, assets with higher expected returns are riskier. For a given amount of risk, MPT describes how to select a portfolio with the highest possible expected return. Or, for a given expected return, MPT explains how to select a portfolio with the lowest possible risk (the targeted expected return cannot be more than the highest-returning available security, of course, unless negative holdings of assets are possible.)
Therefore, MPT is a form of diversification. Under certain assumptions and for specific quantitative definitions of risk and return, MPT explains how to find the best possible diversification strategy.
Read more about this topic: Satellite (financial)
Famous quotes containing the word concept:
“Teaching Black Studies, I find that students are quick to label a black person who has grown up in a predominantly white setting and attended similar schools as “not black enough.” ...Our concept of black experience has been too narrow and constricting.”
—bell hooks (b. c. 1955)
“It is impossible to dissociate language from science or science from language, because every natural science always involves three things: the sequence of phenomena on which the science is based; the abstract concepts which call these phenomena to mind; and the words in which the concepts are expressed. To call forth a concept, a word is needed; to portray a phenomenon, a concept is needed. All three mirror one and the same reality.”
—Antoine Lavoisier (1743–1794)
“I was thinking what an interesting concept it is to eliminate the writer from the artistic process. If we can just get rid of these actors and directors, maybe we got something here.”
—Michael Tolkin, U.S. screenwriter, and Robert Altman. Griffin Mill (Tim Robbins)