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    What is Mean Variance Portfolio Theory a.k.a. Modern Portfolio Theory

    MVPT is a mathematical framework for assembling a portfolio of assets that maximises return for a given level of risk.[1]https://en.wikipedia.org/wiki/Modern_portfolio_theory

    Its key tenets are[2]https://en.wikipedia.org/wiki/Modern_portfolio_theory:

    • owning different kinds of financial assets is less risky than owning only one type
    • an asset's risk and return should be assessed by how it contributes to a portfolio's overall risk and return
    • variance is a proxy for risk

    Assumptions of MVPT

    • stocks face systematic (non diversifiable) risk e.g. market risks: interest rates, inflation
    • stocks face non systemic (diversifiable) risk e.g. poor management

    Does it assume normal distribution of returns ?

    Presumably Warren B et al focus on turning non systemic risk into something they understand and hence isn't a risk but a sure thing ??  so perhaps a takeaway is.. if investing and using ben graham techniques... take on the non systemic risk.. otherwise diversify

    Optimal Portfolio Determined by MVPT

    text...

    Benefits of MVPT

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    Key Mathematical Results

    Expected return or the portfolio

    E[R_{p}]=\sum_{i}^{}w_{i}E[R_{i}]

    Criticisms of Modern Portfolio Theory

    R_[p]

    Questions

    • How does MPT tie in with CAPM as talk of systemic (undiversifiable) risk and non-diversifiable risk sounds like same thing?

    Links