Modern Portfolio Theory (MPT) shows how combining assets with different correlations can reduce portfolio risk without sacrificing expected returns — the framework that earned Harry Markowitz a Nobel Prize. You'll learn how correlation works, why diversification is mathematically powerful, and how to read the efficient frontier to find optimal portfolios for your risk tolerance. I walk through a concrete example showing how two 10% volatility assets can combine into a portfolio with far less risk depending on their correlation. I also cover the three critical limitations of MPT: unstable correlations during crises, reliance on historical data, and fat-tail events the model underestimates. Whether you're studying for the CFA exam or building your own investment portfolio, this video gives you everything you need to understand Modern Portfolio Theory.
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Chapters
0:00 - The Free Lunch of Diversification
0:16 - Harry Markowitz & the 1952 Paper
0:33 - Single Asset Risk Analysis
0:46 - Correlation Explained
1:12 - The Diversification Effect
2:02 - The Efficient Frontier
3:04 - Modern Portfolio Theory Limitations
3:57 - Key Takeaways
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*Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.