Learning about the key concepts of modern portfolio theory (MPT)

What did Harry Markowitz tell us about managing our portfolios? While it may seem somewhat obvious that for any investment, you would want to maximize your investment returns while taking minimal risks, the challenge is implementing that in practice. This is what MPT provides us—a practical framework for calculating risk and using it to determine an optimal makeup for our portfolio. Markowitz makes a number of famous assumptions in his paper, the first of which is called diversification. It simply means that to find a balance between risk and reward, your portfolio should contain different types of investments: some high-risk, high-reward; some low–risk low-reward. To make this actionable, he chooses the metric of correlation to determine whether investments are different or not.

According to MPT, if we assume a portfolio of multiple potential investments, to find our optimal portfolio, we need three...