Two Applications of Modern Portfolio Theory to Portfolio Risk Analysis
Modern Portfolio Theory (MPT) grew out of the mathematical problem of how to construct an efficient portfolio from a chosen set of stocks, given their risks and expected returns, and subject to various practical constraints. Constructing such a portfolio is a purely mathematical process: it is done after the fund manager has made his judgments, and its purpose is to ensure that these judgments are reflected as accurately as possible in the portfolio. Such optimisation is one of the most widespread applications of MPT.
KeywordsOptimal Portfolio Expected Return Excess Return Fund Manager Efficient Frontier
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