Modern Portfolio Theory
Modern Portfolio Theory
Consider a portfolio consisting of a risk-free asset, such as a three-month US Treasury note, and the common stocks Apple (AAPL), Boeing (BA), Disney (DIS), General Electric (GE), Coca-Cola (KO) and Microsoft (MSFT). The plot locates each asset according to its volatility and mean return based on real stock market data from a specified year. The relative size of each bubble indicates the relative amount of money that should be invested in each asset according to modern portfolio theory (MPT). Purchased assets are indicated in green and those that are short-sold are orange. The red curve indicates the efficient frontier and the red dot indicates the portfolio with minimal volatility that achieves the specified minimum mean return.