Abstract
The modern portfolio theory was introduced by Harry Markowitz with the publication of his paper "Portfolio Selection" in the Journal of Finance in 1959 and is called Markowitz portfolio theory (MPT). It is now the major guidance for portfolio allocation decisions for mutual funds, pension funds, and nearly any entity seeking to maximize investment portfolio returns and minimize risks. By exploring how risk-averse investors can construct optimal portfolios through consideration of the trade-off between market risk and expected returns, Markowitz presents the benefits of diversification. Out of a variety of risky investments, an investor can compile an effective portfolio of investments, each of which will offer the maximum possible expected return for a given level of risk. Investors are therefore supposed keep one of the optimal portfolios on the effective level and the rest to adjust to the market risk. The latter is reached through the leverage or de-leverage of that portfolio with positions in a risk-free investment such as government bonds.
