Modern Portfolio Theory (MPT) is a financial approach that helps investors build diversified portfolios to maximize returns while managing risk based on their preferred risk level.

An output of the MPT is the efficient frontier curve shown on the right. The dots below the curve represent the risk and return of portfolios that are less than efficient. The dots that are on the curve represent portfolio performances that are considered efficient. There are three noteworthy points on the curve:

  1. Point A is the maximum return of the portfolio

  2. Point B is the minimum risk of the portfolio

  3. Point C is typically the investor’s preferred choice, as it is a good compromise between the level of risk and the expected return. This is also the point in which the portfolio has the maximum Sharpe ratio.

Use RichKat to see where your stock portfolio falls on the Efficient Curve chart and determine which allocations will give you an efficient portfolio.

An output of the MPT is the efficient frontier curve shown on the right. It looks like an upside down Nike swoosh. All the dots (in cyan) below and to the right of the curve represent the risk and return of portfolios that are less than efficient.