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Definition

Investing theory in which portfolio managers estimate and manage risk and return. Modern Portfolio Theory (MPT) is based on the "random walk hypothesis" which maintains that it is impossible to predict share prices because they move in a random walk. MPT maintains that there is no dependence between today's price and that of yesterday. MPT then attempts to optimize the risk in a portfolio and to ensure that it has an overall beta as close as possible to the market - i.e. 1. MPT is no longer modern in that it has relatively few followers today since there is mounting evidence that markets contain considerable imperfections.

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