Investment Dictionary

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Investment Dictionary - Modern portfolio theory

A body of academic work founded on the following concepts. First, markets are too efficient to allow returns in excess of the market's overall rate of return to be achieved through trading systems. Active management is therefore counter-productive. Second, asset classes can be expected to achieve, over sustained periods, returns taht are commensurate with their level of risk. Riskier asset classes, such as small companies and value companies, will produce higher returns as compensation for their higher risk. Third, diversification across asset classes can increase returns and reduce risk. For any given level of risk, a portfolio can be constructed that will produce the highest expected return. Finally, there is no right portfolio for every investor. Each investor must choose an asset allocation that results in a portfolio with an acceptable level of risk.

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