Modern Portfolio Theory is recognized as one of the most important and influential economic theories of finance and investment. Modern Portfolio Theory is based upon the simple idea that diversification can produce the same total returns for less risk. Combining many financial assets in a portfolio demonstrates a lower level of risk than putting all your investments in one basket. The theory has four basic premises: investors are risk averse; securities are traded in efficient markets; risk should be analyzed in terms of an investor’s overall portfolio rather than individual assets; and for every level of risk, there is an optimal portfolio of assets that will have the highest expected return.

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