Framework

Modern portfolio theory and the efficient frontier

The question it answers

When spreading savings across several assets, which portfolio should an individual investor choose to get the highest expected return for the risk they can accept?

Origin
Markowitz (1952); Tobin (1958) adds the risk-free asset
Diagram type
2×2 matrix
Level of analysis
Individual
Topics
Corporate finance
Stack of clay coins beside a rising glass bar chart, icon for finance

Diagram

Modern portfolio theory and the efficient frontier

LowExpected returnHigh
Efficient, rareLow risk
Efficient but volatileMedium risk
Safe but low yieldLow risk
Inefficient: dominatedHigh risk
LowRisk (standard deviation)High

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Markowitz, H. (1952) ‘Portfolio selection’, Journal of Finance, 7(1), pp. 77–91.doi:10.1111/j.1540-6261.1952.tb01525.xSource page
  2. Tobin, J. (1958) ‘Liquidity preference as behavior towards risk’, Review of Economic Studies, 25(2), pp. 65–86.doi:10.2307/2296205Source page