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Finance allah shmoop what is modern portfolio theory All right

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basic idea Here people Diversification is good Dig it right

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C d i g there that's modern Alright let's goto

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a gn modern like when hunk and invested from their

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cave Well they just invested in good rocks or spears

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and really didn't worry about much else And well math

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hadn't really been invented yet So like who knew that

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If all right well then along came harry markowitz in

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nineteen fifty two who tried to science and math the

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crap out of the stock market What he came up

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with was modern portfolio theory which basically said that there

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was a smarter way to invest than just you know

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putting your life savings into blockbuster because you like the

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logo using all sorts of advanced metrics that we won't

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torture you with here The theory he devised was that

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well rather than throwing your money against the wall to

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see what sticks you could use extensive elaborate data to

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determine the best way to maximize your returns depending on

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how much risk you were willing Teo you know risk

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And there are five key ideas behind modern portfolio theory

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And yes of course we have videos on each of

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these The first is alfa which is kind of like

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how smart you are in the market Then there's beta

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which is about volatility in a broadway The vics we

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got a whole video set on that Then they're standard

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deviation and no that's not some kinky reference to fifty

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shades It's more about how the market diverges from your

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given individual stock pick and volatile things are finally the

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beta then there's our squared it's all about how a

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stock or a given index conforms to a given line

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or expected return ratio Like how close it is how

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proximate is And then finally you have the sharpe ratio

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Thank you bill sharp from stanford university who also talked

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about being smart in the market so that you could

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evaluate your rich turns whether they were smart or just

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a lottery ticket Lucky Oh and we're probably not such

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a wise investment in the beginning even though they turned

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out okay That would be sort of the sharpe ratio

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Yeah all right Well in general mpt skews toward less

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risky investments but it all comes down to risk reward

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Tolerance in the end if for whatever reason you feel

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supremely confident that radio shack is about to make a

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massive come back well you might be able to justify

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taking more risk in loading the dice But to be

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clear radio shack was just a bad example So kids 00:02:33.29 --> [endTime] don't try this at home

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