- Modern portfolio theory is a mathematical approach that helps in creating an investment portfolio by considering both the potential risks and returns.
- This theory has evolved since the 1950s and describes the mathematics of constructing an optimal portfolio based upon risk and return parameters.
- It involves selecting assets that have a correlation with historical returns and that can diversify the portfolio.
- MPT key component is Diversification meaning that optimal results are achieved by selecting a balanced mix of high-risk/high-return and low-risk/low-return investments, tailored to individual risk tolerance.
This notebook is intended to help you all understand the end-to-end process of modern portfolio theory using real-time data. I assure you, it's an interesting one!
Our sample portfolio comprises eight diverse assets, representing exposure to various sectors in the Global Industry Classification Standard (GICS). These sectors include retail, consumer discretionary, healthcare, industrials, materials, technology, utilities, and chemicals. Historical data from Yahoo Finance was collected, spanning from January 1, 2018, to December 31, 2022, providing valuable insights for our analysis.