Modern Portfolio Theory (MPT), pioneered by Harry Markowitz in the 1950s, transformed investment management by formalizing how diversification reduces portfolio risk. Rather than focusing solely on high‑return individual assets, MPT emphasizes the interplay between asset correlations: by combining instruments whose price movements do not perfectly align, investors can dampen overall volatility while preserving expected returns. The efficient frontier portfolios offering the highest return for a given level of risk serves as a roadmap for constructing balanced allocations.
Beyond mean‑variance optimization, today’s asset allocators consider additional dimensions such as liquidity, tail‑risk and factor exposures (e.g., value, momentum, quality). Strategic asset allocation establishes long‑term policy weights across stocks, bonds, real estate and alternative investments, while tactical shifts allow managers to capitalize on transient market dislocations. Advances in technology and data analytics have made multi‑asset modeling more precise, yet the enduring lesson of MPT remains: diversification, when executed thoughtfully, is one of the few “free lunches” in finance.