Modern portfolio theory

In this part, we discuss modern portfolio theory (MPT). This topic is strongly related to investment diversification. The approaches we discuss, can help investors to determine optimally diversified portfolios.

First, we discuss allocating money between a risky portfolio and a riskless asset and derive the capital allocation line. Then we move on and explain how you can determine the risky portfolio. This is done using Markowitz’s portfolio selection approach. Finally, we combine the findings from both these topics to determine how an investor should allocate his money. All the approaches are implemented using Microsoft Excel and this Excel file is available for download.