Modern Portfolio Theory: Sharpe, Beta, Alpha & Efficient Frontier

The Problem MPT Solves

Traditional investing focused on picking "good" stocks. Harry Markowitz's 1952 paper flipped this: don't evaluate stocks in isolation — evaluate them in the context of a portfolio. Two "risky" stocks combined can produce a lower-risk portfolio if their price movements aren't correlated.

Core Insight: Diversification is a Free Lunch

For the same expected return, adding uncorrelated assets reduces total volatility without lowering expected returns. This is the only "free lunch" in finance.