Essay On Modern Portfolio Theory

Modern Portfolio Theory (MPT) is a theory originally developed by Harry Markowitz which help risk-averse investors to construct a portfolio by maximizing expected return with a given level of market risk by constructing an efficient frontier (Investopedia, n.d.). This theory focus on effect of investment in the overall portfolio risk and return instead of looking at individual assets risk and return alone. A portfolio of various assets that can maximize the return at a given risk level can be constructed. Every investor hopes to see high possible long-term return with the minimum short-term market risk. MPT theory promote that an investor can hold an individual risky asset such as mutual fund but the risk will be reduced and the portfolio will be balanced when combined with some of the other types of assets. This model were based on the assumptions that correlations between different asset classes are always constant, efficient market, rational investors and return of financial assets are usually distributed (David, 2012).

This theory is very important during financial risk management. Portfolio management use this theory widely in creating an investment diversification strategies. The possibility of failure will be

The management and operating fees for the fund were being charged at around 1% to 1.5% per year on managing the equity-based mutual funds with the absence of front-end loads. Expenses would increase due to the rise of dealing cost and taxes whereas performance would also be affected over the long run. Lower cost assets that can provide a total construction annual fee of 2% to 4% lower than the funds that has been managed such as the ETFs or other index funds should be taken into consideration. It would help the investor to save and also increase their return (Vern,