Modern Portfolio Theory: analysis and implication

Yixuan Liu

doi:10.54254/2754-1169/4/20221048

Research Article

Open access

Published on 21 March 2023

Download pdf

Liu,Y. (2023). Modern Portfolio Theory: analysis and implication. Advances in Economics, Management and Political Sciences,4,158-164.

Export citation

Modern Portfolio Theory: analysis and implication

Yixuan Liu *^,1,

¹ Shanghai Shangde Experimental School, Shanghai, 201208, China

* Author to whom correspondence should be addressed.

https://doi.org/10.54254/2754-1169/4/20221048

Abstract

The Modern Portfolio Theory (MPT) from quantitative theory explains the correct of the logic of investment which isn’t put all your eggs in one basket. Although this theory is published in 1952, investors are still using this theory nowadays. Therefore, this paper is researching why this theory is enduring, whether it can provide some insights into the behavior of investors, and what shortcomings can be solved by using other derivative theories based on this theory. The most significant observation of this study can be divided into two parts. Firstly, many limitations of MPT can be improved by Goal-based investing and Post-modern portfolio theory. Secondly, this theory can help the investor to choose the optimal portfolio theory depending on their attitude and goal when they chose the portfolio. There is a strong need for a novel approach, especially for concluding extra costs when investors calculate the risk-adjusted returns. After that, this theory is using historical data to calculate the expected data. Those limitations will influence the choice of optimal portfolio theory.

Keywords

Useful and limitation, Post modern portfolio theory., Portfolio theory, Goal-based investing

View pdf

References

[1]. The Investopedia Team, https://www.investopedia.com/terms/m/modernportfoliotheory.asp, last accessed 2021/09/10.

[2]. Spaulding, W. C. (n.d.). https://thismatter.com/money/investments/modern-portfolio-theory.htm

[3]. IT world network, https://news.hnce.org/vr/202103/104552.html?ivk_sa=1024320u, last accessed 2021/03/11.

[4]. Nath, R., https://www.financialexpress.com/market/cafeinvest/how-diversification-can-help-investors manage-risk-and-reduce-volatility/2278454/#: ~: text=In%20simpler%20terms%2C%20diversification%20is%20the%20act%20of,because%20all%20assets%20be%ifferentl20over%20differently%20tenures,, last accessed 2021/06/26.

[5]. Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/modern-portfolio-theory-mpt/#:~: text=The%20Modern%20Portfolio%20Theory%20focuses%20on%20the%, 0relationship,prices%20and%20airline%20stock%20prices%20are%20negatively%20correlated. Last accessed 2022/02/04.

[6]. Sean Ross, https://www.investopedia.com/ask/answers/030515/how-correlation-used-modern-portfolio-theory.asp, last accessed 2022/05/20.

[7]. Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/other/idiosyncratic-risk/#:~: text=Idiosyncratic%20risk%20is%20the%20risk%20that%20i, %20particular,affects%20all%20investments%20within%20a%20given%20asset%20class. Last accessed 2020/09/13.

[8]. Chen, J., https://www.investopedia.com/terms/i/idiosyncraticrisk.asp, last accessed 2022/05/12.

[9]. Cockerham, R., https://finance.zacks.com/portfolio-diversification-theory-6684.html, last accessed 2019/02/20.

[10]. Sohu, https://www.sohu.com/a/327582518_120055029, last accessed 2019/07/17.

[11]. New wealth known clubs, https://www.sohu.com/a/311167156_99971003, last accessed 2019/04/30.

[12]. Yale News, https://news.yale.edu/2021/10/14/yale-endowment-earns-402-investment-return-fiscal-2021, last accessed 2021/10/22.

[13]. Go4WorldBusiness, http://blog.go4worldbusiness.com/2017/10/16/how-to-minimize-risk-through-diversification/, last accessed 2021/09/16.

[14]. Adams,J., https//www.realized1031.com/blog/what-are-the-benefits-cons-and-limitations-of-modern-portfolio-theory, last accessed 2021/10/28.

[15]. Perrin,M., https://www.slideserve.com/mirielle/portfolio-theory-capital-market-theory-capital-asset-pricing-model, last accessed 2012/05/08.

[16]. Nordqvist, C.https://marketbusinessnews.com/financial-glossary/market-risk/, last accessed 2019/02/24.

[17]. Gunderson, G.Sttps://www.forbes.com/sites/garrettgunderson/2020/09/01/how-the-coronavirus-has-exposed-three-flawed-assumptions-of-modern-portfolio-theory/?sh=46dda83ef2b8, last accessed 2020/08/14.

[18]. Chen, J., https://www.investopedia.com/terms/p/pmpt.asp, last accessed 2022/05/30.

[19]. Gordon, J. https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/post-modern-portfolio-theory-definition, last accessed 2022/04/17.

[20]. Cloudflare, https://asymmetricalrisk.com, last accessed 2020/09/30.

[21]. Chen, J., https://www.investopedia.com/terms/g/goalbased-investing.asp, last accessed 2020/06/28.

[22]. Demarco, J., https://www.thebalance.com/what-is-goal-based-investing-5202804, last accessed 2021/09/23.

[23]. Brian M. Rom, Kathleen W. Ferguson: "Post-Modern Portfolio Theory Comes of Age." International Actuarial Association (2021).

[24]. Wallstreetmojo Editorial Team, https://www.wallstreetmojo.com/indifference-curve/, last accessed 2022/05/23.

[25]. CFA, https://zhuanlan.zhihu.com/p/194172235, last accessed 2020/08/22.

[26]. Banton, C. https://www.investopedia.com/terms/i/indifferencecurve.asp#:%: E:text=1%20An%20indifference%20curve%20shows%20a%20, ombination%20of,origin%2C%20and%20no%20two%20indifference%20curves%20ever%20intersect, last accessed 2022/07/05.

Cite this article

Liu,Y. (2023). Modern Portfolio Theory: analysis and implication. Advances in Economics, Management and Political Sciences,4,158-164.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

Disclaimer/Publisher's Note

The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of EWA Publishing and/or the editor(s). EWA Publishing and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.

About volume

Volume title: Proceedings of the 6th International Conference on Economic Management and Green Development (ICEMGD 2022), Part Ⅱ

Conference website: https://www.icemgd.org/

ISBN：978-1-915371-17-1(Print) / 978-1-915371-18-8(Online)

Conference date: 6 August 2022

Editor：Canh Thien Dang, Javier Cifuentes-Faura

Series: Advances in Economics, Management and Political Sciences

Volume number: Vol.4

ISSN：2754-1169(Print) / 2754-1177(Online)

© 2024 by the author(s). Licensee EWA Publishing, Oxford, UK. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license. Authors who publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See Open access policy for details).