Modern Portfolio Theory is Markowitz's theory regarding maximizing the return investors could get in their investment portfolio considering the risk involved in the investments. MPT asks the investor to consider how much the risk of one investment can impact their entire portfolio.
To choose the best portfolio from a number of possible portfolios, each with different return and risk, two separate decisions are to be made, detailed in the below sections:
- Determination of a set of efficient portfolios.
- Selection of the best portfolio out of the efficient set.