{"id":16,"count":11,"description":"Modern portfolio theory (MPT), seeks to optimize investment return while lowering risk. MPT is rooted in the concept of diversification whereby an investor selects a variety of asset classes that collectively lower risk below the risk profile of any individual asset class. Diversification lowers risk because asset classes are generally uncorrelated, or more specifically, change value in opposite directions. The most obvious example of this is when stocks fall bonds often increase, and vice versa. By adding up to six asset classes to a portfolios' architecture, the stabilizing benefit of diversification can be increasingly felt. A collection of asset classes will have an overall lower risk profile than any individual asset class. Ironically, even adding an asset class that might be perceived as \"risky\" can lower the overall risk in a portfolio, thus diversification has been described as \"the only free lunch you will find in the investment game.\"\r\n\r\nMPT is the philosophical opposite of traditional stock picking. MPT is based upon investing in entire markets or indexes, rather individual stocks recommended by business analysts who look for equities that will outperform the index. With MPT investments are described statistically in terms of their expected long-term return rate and their expected short-term volatility. Volatility is equated with \"risk\" and provides a measurement of how far below the average an investment's bad years are likely to be. The goal of this investment approach is to identify your acceptable level of risk tolerance, and then build a diversified portfolio with the maximum expected return for that defined level of risk.","link":"https:\/\/www.marketriders.com\/investing\/category\/active-versus-passive-investing\/modern-portfolio-theory\/","name":"Modern Portfolio Theory","slug":"modern-portfolio-theory","taxonomy":"category","parent":3,"meta":[],"yoast_head":"\nInvesting advice: Modern Portfolio Theory | MarketRiders<\/title>\n<meta name=\"description\" content=\"Retirement investing tips and advice for Modern Portfolio Theory\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.marketriders.com\/investing\/category\/active-versus-passive-investing\/modern-portfolio-theory\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Investing 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