Modern Portfolio Theory & Efficient Frontier

The Big Idea

In 1952, Harry Markowitz proved mathematically that combining uncorrelated assets creates a portfolio with lower risk than any individual asset — for the same expected return.

Key Concepts

• Expected Return: Weighted average of individual asset returns.
• Portfolio Risk (variance): NOT the weighted average — depends on covariance between assets.
• Correlation: −1 (perfect inverse) to +1 (perfect co-move). 0 = uncorrelated.