Question

Explain the modern portfolio theory (MPT) and identify two recognized fathers of MPT and their contributions.

Answer 1

Modern portfolio theory advocates that it is possible for investor to create a Portfolio which will be providing maximum return and minimise the risk associated with the investment and it will be advocating the diversification of securities as well as asset classes in order to benefit from elimination of the systematic risk.

modern portfolio theory advocates that the stock will be facing both systematic as well as systematic risk and unsystematic risk cannot be diversified but unsystematic risk can be eliminated so investors should try to maximise their return and minimise the risk by properly diversifying the portfolio.

Recognised father of modern portfolio theory is Harry markowitz who has won the Nobel prize and he has designed an optimum portfolio for Risk averse investors for maximizing the rate of return in the market.