Modern Portfolio Theory is used to build portfolios with the highest returns for a chosen amount of risk.
MPT reveals that combining assets with lower correlations (dissimilar) optimizes returns.
Modern Portfolio Theory solves the problem thought about daily by all those investing money - how to construct a portfolio. Modern Portfolio Theory builds a portfolio with a higher probability of positive returns and a lower probability of losses (negative risk). These are highly-diversified portfolios - similiar to what foundations, endowments and large pension funds create on a smaller scale.
We build your Portfolio evaluating 5 criteria:
Correlation which describes how investments behave when placed in a portfolio. Bank and Savings & Loan stocks behave similarly. While Biotechnology and Natural Resources stocks behave dissimilarly. See chart.
A portfolio's return is attributable to which asset classes compose your portfolio. A portfolio made entirely of Bonds will have returns similar with Bond returns. If your portfolio is composed of a broad variety of different Asset classes - your returns will be similar with those investments.
Each investment has its own characteristics: liquidity, relative performance, sensitivity and the speed of price change. Semiconductor stocks have different characteristics than Pharmaceutical stocks. See chart.
Investment risk which is almost always overlooked in portfolio construction. In addition to what an investment can add to your portfolio - each investment also has the ability to damage your portfolio with its potential losses.
Active optimization adjusts your portfolio to a changing world. All investors know of investments which they should have sold. Underperformers are largely responsible for your poor performance.
Your Portfolio must adjust to an ever-changing world.
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