What this lesson is about
Harry Markowitz's big idea. Combining the right assets can lower risk without giving up return.
Part 1 of 2
Harry Markowitz's big idea won him a Nobel Prize: combining the right assets can lower a portfolio's risk without giving up expected return. The math works. Assets that aren't perfectly correlated smooth each other out. When one dips, an uncorrelated asset is less likely to dip at the same time.
This creates what MPT calls the 'efficient frontier'. For every level of risk you're willing to accept, there's a theoretically optimal portfolio mix that maximizes expected return for that level of risk.
Quick check
What is the central idea of Modern Portfolio Theory (MPT), introduced by Harry Markowitz?
Markowitz won a Nobel Prize for formalizing exactly how combining imperfectly-correlated assets can improve a portfolio's risk/return profile.
Part 2 of 2
Quick check
In MPT, what is the 'efficient frontier'?
It's a curve, not a single point - every level of acceptable risk has its own theoretically-optimal portfolio along that curve.
Test what you just learned. Correct moves you up, wrong moves you down - reach 100 to master this lesson.