Modern Portfolio Theory (MPT)

What this video covers

• Why MPT evaluates investments at the portfolio level, not in isolation, and why a volatile asset can actually reduce total portfolio risk
• How correlation between assets determines whether diversification lowers risk, and why low or negative correlation is the engine behind the "magic"
• What the efficient frontier represents: the set of portfolios offering the highest expected return for each level of risk (standard deviation)
• Why portfolios on the efficient frontier are optimal, portfolios below it are suboptimal, and portfolios above it are impossible
• The risk-return tradeoff: why there is no free lunch, and why every incremental return above the risk-free rate requires accepting additional risk
• How beta measures the systematic risk that remains after diversification, and how the Capital Asset Pricing Model (CAPM) prices expected return from that beta
• Why alpha measures performance against CAPM's risk-adjusted expectation, and the critical exam distinction between MPT (the broad framework) and CAPM (the specific pricing model)