Modern portfolio theory (MPT) is a strategy that focuses on investing in different asset classes to reduce investment risk while achieving the best return possible.
What is modern portfolio theory?
Each asset class has forecasted annual returns and levels of risk. Investors can invest in multiple asset classes to leverage the maximum level of risk they are willing to take for a chance at more returns. MPT works by optimizing the level of risk an investor is willing to take to achieve returns. This approach allows investors to maximize the chances of reaching their goals gradually.