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Markowitz’s portfolio theory, also known as the Modern Portfolio Theory (MPT), represents a pioneering contribution to financial economics as it provides a structured framework for investment decision-making. It was introduced by Harry Markowitz in 1952, laying the foundation for understanding how rational investors can construct an efficient portfolio to maximize expected return for a given level of risk, or equivalently minimize risk for a given level of return. The theory emphasizes the principle of diversification and employs quantitative measures such as expected return, variance, and covariance to explain how assets can be combined to achieve optimal results. The first key point of Markowitz’s theory is the concept of expected return. The return of a portfolio is not simply the return of a single asset but is calculated as the weighted average of expected returns of individual assets. The weights correspond to the proportion of funds invested in each asset. This principle recognizes that portfolio performance depends on the combined outcomes of all securities rather than a single investment choice. Another important point is risk measurement. Markowitz argued that risk cannot be captured merely by looking at the variance of individual securities, but rather must include the variance and covariance of returns among all ________ ________ ____ ___ _______ ___ _____ ________ ____ ____ ___.
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