Modern Portfolio Theory Law and Legal Definition

Modern Portfolio Theory (MPT) is a theory of investment which tries to maximize return and minimize risk by carefully choosing different assets. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. This is possible, in theory, because different types of assets often change in value in opposite ways. According to the theory, it's possible to construct an efficient frontier of optimal portfolios offering the maximum possible expected return for a given level of risk. Also called "portfolio theory" or "portfolio management theory."