A simple explanation of the most influential idea in investing. Modern Portfolio Theory (MPT) is a mathematical framework that helps investors build portfolios that balance risk and return. It was introduced by Harry Markowitz in 1952 and remains one of the foundations of modern finance. Even if you're new to investing, MPT helps you understand why diversification matters and how to build safer, more efficient portfolios.
Risk vs Return Trade-off:
💡 The curve shows optimal portfolios. Your portfolio should be on or near this line. Portfolios below the curve are suboptimal — you could get better returns for the same risk.
Most people invest by picking stocks they like. But MPT shows that:
This is why MPT is used by hedge funds, robo-advisors, and institutional investors.
MPT says that a portfolio's risk is not just the sum of its parts. What matters is how assets move together. Two risky stocks can create a less risky portfolio if they don't move in the same direction. This is why diversification works.
Diversified across tech, index, and growth
This is the average return you expect from an asset based on historical data. Your tool calculates expected return using rolling historical windows (1, 3, 5, or 10 years).
Volatility measures how much an asset's price moves up and down. Higher volatility = higher risk. Your tool calculates volatility using standard deviation of returns.
Correlation measures how two assets move relative to each other.
Low or negative correlation reduces portfolio risk.
This is a table that shows how every pair of assets moves together. It's the mathematical engine behind portfolio optimization. Your tool builds this matrix automatically.
The Efficient Frontier is a curve that shows the best possible portfolios for each risk level. Portfolios on the frontier:
Anything below the frontier is inefficient.
This is the portfolio with the highest Sharpe Ratio, meaning the best return per unit of risk. Your tool finds this portfolio automatically.
Want the math details? Read the full model walkthrough in our MPT deep dive.
Your app uses MPT to:
All of this happens behind the scenes — and is explained in plain English.
You don't need to:
The tool does everything for you and explains the results clearly. This makes investing safer and easier for beginners and busy people.
MPT is powerful, but not perfect. It assumes:
This is why your tool also uses:
These models improve stability and realism.
Modern Portfolio Theory is the foundation of smart investing. It helps you build diversified portfolios that balance risk and return — without guesswork. Your tool makes MPT simple, transparent, and accessible to everyone.
Portfolio A (Single Stock):
Portfolio B (10 Diversified Stocks):
→ Portfolio B sacrifices 1% return but reduces risk by 36%. The higher Sharpe Ratio means better risk-adjusted performance. Learn more in our MPT deep dive.
MPT helps you build a diversified portfolio that maximizes return for a given level of risk.
Yes — it provides a structured way to think about diversification. Start with quality stocks.
Historical returns, volatility, and correlations between assets. See our MPT deep dive for details.
Absolutely. It's the foundation of most modern investing strategies, including Black-Litterman.
No — it helps optimize risk vs return, not predict the future. Learn more in quant investing basics.
Add multiple stocks and let our tool find the optimal allocation.
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