Modern finance · 1950s–1990s
1952
Portfolio theory
Harry Markowitz shows how mixing investments lowers risk.
In "Portfolio Selection" (1952), Harry Markowitz measured risk as the spread of returns and showed that combining investments that don't move together lowers risk for the same expected return.
💡 Why it made sense then
Investors already said "don't put all your eggs in one basket"; Markowitz showed how many baskets and which ones.
Ideas it gave us
- 🎯 Diversification
Diversification is spreading money across many different investments so a loss on one has less effect on the whole portfolio.
- 📈 Portfolio
A portfolio is the full set of investments a person or fund owns, such as stocks, funds, bonds and cash.
- 🧺 Asset allocation
Asset allocation is how you divide a portfolio among types of investment, such as stocks, bonds and cash, based on your goals and tolerance for risk.
- 🎯 Standard deviation
Standard deviation measures how spread out a set of numbers is around its average. In investing, it's the usual measure of volatility.
- 🎯 Risk tolerance
Risk tolerance is how much loss or price swing an investor can accept, financially and emotionally, in pursuit of higher returns.
Practise with $10,000 in play money
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