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Modern Portfolio Theory
Modern Portfolio Theory (MPT) is a term used for a growing body of academic research that has earned a Nobel Prize for its contributors. MPT underlies our passive investment approach impacting on the principles of diversification, risk and tax management, and asset class dimensions.
The four major tenets of MPT are:
- Markets process information so rapidly when determining security prices that it is extremely difficult to gain a competitive advantage by exploiting market pricing anomalies.
- Over time, riskier asset classes provide higher expected returns as compensation to investors for accepting greater risk.
- Adding high risk, low correlating asset classes to a portfolio can actually reduce volatility and increase expected rates of return.
- Passive asset class investment portfolios can be designed with the expectation of delivering higher returns for a chosen level of risk over time.
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