Defining risk profiling, portfolios, and projections

In this section, we’ll learn about the basic building blocks of any investment – risk and portfolios.

You may be surprised to learn that despite all the innovation around how investing is done in 2022, the fundamental principles of how investments are made haven’t changed since 1952. That is the date of Harry Markowitz’s famous thesis paper simply titled Portfolio Selection (Markowitz). It outlines the principles used by nearly all investment advisors today, including Robo-advisors. The significance of this work eventually saw him awarded the 1990 Nobel Prize in Economics.

Modern portfolio theory

Before we dive into the specifics of Markowitz’s theory, now named Modern Portfolio Theory (MPT), we should stop to ask ourselves why we need a portfolio to begin with. Can’t we just invest in stocks like people on Robinhood? Well, technically speaking, any investment that contains more...