Explain 'Modern Portfolio Theory' (MPT).

Explain 'Modern Portfolio Theory' (MPT).

Approach: Describe how to maximize return for a given level of risk through diversification.

A framework for constructing a portfolio of assets such that the expected return is maximized for a given level of risk. It emphasizes that risk is reduced by diversification (holding uncorrelated assets).

Follow-up: What is the Efficient Frontier?

Key concepts: efficient frontier, variance, correlation.