Modern Portfolio Theory - Introduction
Modern portfolio theory is the philosophical opposite of traditional stock picking.
It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who look for what makes each investment opportunity unique.
Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility.
The volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be.
The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that level of risk.
This article covers the highlights of modern portfolio theory, describing how risk and its effects are measured, and how planning and asset allocation can help you do something about it.