What is Modern Portfolio Theory (MPT)?

Modern Portfolio Theory (MPT) is a mathematical framework used to construct a portfolio of assets to maximize the expected return based on a specific level of risk. MPT is considered a formalized extension of investment diversification (owning a wide variety of assets within a portfolio). Its framework states that an asset's risk and return should not be evaluated on its own, but instead by how it contributes to the entire portfolio's overall risk and return potential. Renowned economist Harry Markowitz ideated MPT in a 1952 essay that later resulted in him winning the Nobel Memorial Prize in economics.