Modern Portfolio Theory
Modern portfolio theory is Markowitz mean-variance optimization — diversify covariances, not just names, to get more return per unit of variance.
Definition
Modern Portfolio Theory refers to variance optimization — diversify covariances, not just names, to get more return per unit of variance. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When variance optimization — diversify covariances, not just names, to get more return per unit of variance shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what modern portfolio theory is saying. If variance optimization — diversify covariances, not just names, to get more return per unit of variance moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Modern Portfolio Theory: what would falsify the current reading in the next window?