The Most Important Theory in Finance

Economics in Action

In this episode, we'll look at Modern Portfolio Theory, which revolutionized the field of investment portfolio management by introducing a quantitative framework for maximizing investment returns relative to risk. The theory emphasizes the importance of diversification, advocating for the creation of an 'efficient frontier' of optimal portfolios that offer the highest expected return for a given level of risk. Central to MPT is the concept that the risk of a portfolio can be reduced and its expected return maximized through careful asset selection based on their expected returns, risks, and the correlations between them.

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