Pronunciation: [ˌɛmpˌiːtˈiː] (IPA) 
The spelling of the word "MPT" is typically pronounced as /ɛm pi ti/. The pronunciation of this word is broken down into three sections, the first being the letter "M" pronounced as /ɛm/. The second section is the letter "P" pronounced as /pi/. Lastly, the letter "T" is pronounced as /ti/. When the three sections are combined, it results in the pronunciation of /ɛm pi ti/, making up the spelling of the word "MPT".
MPT, or Modern Portfolio Theory, is a concept in finance that describes an investment strategy and framework developed by economist Harry Markowitz in the 1950s. It is a fundamental theory used in portfolio management to optimize risk and return.
MPT is based on the idea that an investment portfolio should be constructed based on the expected return and risk associated with each individual asset within the portfolio. The theory suggests that by diversifying investments across various asset classes, such as stocks, bonds, and commodities, an investor can reduce the overall risk of the portfolio without sacrificing potential returns.
The MPT framework involves the calculation of expected returns for each asset, as well as the assessment of the assets' historical volatility and correlation with other assets. These inputs are used to determine the optimal allocation of assets within a portfolio to achieve the highest possible return for a given level of risk.
Central to the theory is the concept of the efficient frontier, which represents the set of portfolios that offer the maximum expected returns for each level of risk or the minimum risk for a given expected return. The efficient frontier is determined by plotting the risk-return tradeoff for different asset allocations.
MPT also introduces the concept of the capital market line, which depicts the risk and return relationship including a risk-free asset. By combining a risk-free asset with a portfolio on the efficient frontier, an investor can create a new portfolio that is tailored to their risk preference.
MPT is widely used by financial advisors, institutional investors, and portfolio managers to construct and manage investment portfolios. It provides a systematic approach to asset allocation and risk management, allowing investors to make informed decisions based on quantitative analysis rather than relying solely on intuition or market speculation.
