As ubiquitous as MPT might be, it still has some shortcoming...
As ubiquitous as MPT might be, it still has some shortcomings in the real world. For starters, it often requires investors to rethink notions of risk. Sometimes it demands that the investor take on a perceived risky investment (futures, for example) in order to reduce overall risk. That can be a tough sell to an investor not familiar with the benefits of sophisticated portfolio management techniques.
Likewise, it is logical to borrow to hold a risk-free asset and increase your portfolio returns, but finding a truly risk-free asset is another matter. Government-backed bonds are presumed to be risk-free, but, in reality, they are not. Securities such as gilts and U.S. Treasury bonds are free of default risk, but expectations of higher inflation and interest rate changes can both affect their value.
Then there is the question of the number of stocks required for diversification. How many is enough?
Likewise, it is logical to borrow to hold a risk-free asset and increase your portfolio returns, but finding a truly risk-free asset is another matter. Government-backed bonds are presumed to be risk-free, but, in reality, they are not. Securities such as gilts and U.S. Treasury bonds are free of default risk, but expectations of higher inflation and interest rate changes can both affect their value.
Then there is the question of the number of stocks required for diversification. How many is enough?
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doctorpot1 : I find that the beauty of MPT is that the control is in the hands on the users. They can choose to use it to lower their risk, use it to increase their returns, or both. The tool does not force them to take on riskier product if they don't want to, as it is just a statistical framework to guide the user. it is a versatile tool for investors.
made a simplified post on it too here, Explained Simply: Modern Portfolio Theory, Optimising Risk and Reward of your portfolio
https://www.moomoo.com/community/feed/109377638825990?data_ticket=5b3500b278c1b7aa4a176e85285988a1&futusource=nnq_details_discuss