Modern Portfolio Theory (MPT)

Overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially as measured by alpha, beta, and R-squared. This theory recommends that the risk of a particular stock should not be looked at on a standalone basis, but rather in relation to how that particular stock´s price varies in relation to the variation in price of the market portfolio. The theory goes on to state that given an investor´s preferred level of risk, a particular portfolio can be constructed that maximizes expected return for that level of risk. also called modern investment theory.