Modern Portfolio Theory
This is essentially the keystone of smart investing and it’s the methodology used by most institutional investors today. A “portfolio” by definition in terms of finance, is a collection of market securities which an investor holds a position in.
So if you own stocks in Apple, Ford, and Beyond Meat, then the collection of those stocks is your portfolio. (simple portfolio pictured right)
Modern Portfolio Theory (MPT) refers to the way in which the portfolio is managed. Which securities will go into it, how much of each security to invest in, how long to hold the securities etc. MPT defines the process in which this should be carried out, we’ll explain how the process works briefly but first to help you understand we’re going to give an overview of why it’s important.