Modern Portfolio Theory

What is Modern Portfolio Theory?

Harry Markowitz was the founder of Modern Portfolio Theory which forms the foundation of investment literature. The Modern Theory assumed that the returns are always normally distributed, which means investors are only concerned about the means and variance of the returns. It also assumes that investors are rational and risk-averse. Another assumption of the theory is that capital markets are perfect, and investors don’t pay any commission or taxes.

Why is it important to know This Theory?

This theory forms the foundation of all investment models such as CAPM. Hence, one can’t understand these investment models without understanding the Theory.