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Odds are that you’ve encountered modern portfolio theory before, even if you’ve never heard the term. It’s been a driving force behind investment advice for decades.
Briefly, modern portfolio theory is the idea that as you diversify your investments, you ensure that riskier investments are offset, at least to some degree, by more conservative ones, based on your risk tolerance.
In other words, an individual investment’s risk shouldn’t be viewed in a vacuum. It should be scrutinized based on how it fits into the portfolio’s overall risk and return. Before modern portfolio theory, investors tended to view each investment in isolation.
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