Example Asset Pricing Questions

  1. Modern Portfolio Theory (MPT)
  2. Prospect Theory
  3. Stock beta
  4. 3-factor and 5-factor
  5. Liquidity
  1. General
  2. Market dynamics
  3. CAPM
  4. Factor models
  5. Limits to Arbitrage
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Modern Portfolio Theory (MPT)

Can you explain the Modern Portfolio Theory and its significance in asset pricing?

Hint

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Answer

Modern Portfolio Theory (MPT) is a framework for constructing an investment portfolio to maximize expected return for a given level of risk. It emphasizes diversification across different assets to reduce risk. The key takeaway of MPT is the concept of the 'efficient frontier', which represents the most efficient portfolios providing the highest expected return for a given level of risk. It's significant because it guides investors in making informed decisions about balancing risk and return.