Modern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT) is an investment framework that helps traders optimise the risk-reward balance of their cryptocurrency portfolios. Originally developed by economist Harry Markowitz in 1952, MPT aims to construct a portfolio in such a way that it maximises returns for a given level of risk by diversifying assets.
In the context of cryptocurrency, where the market is highly volatile and speculative, MPT advocates diversification, which involves holding a variety of different cryptocurrencies (or other digital assets) to reduce the risk of the entire portfolio. By trading in cryptocurrencies that do not move in perfect correlation (i.e., they do not all rise or fall together), the overall portfolio risk is reduced.
MPT focuses on individual assets, as well as the relationship between assets in the portfolio. It assumes that each asset in a portfolio has an expected return, which is based on its historical performance or other projections.
Key Takeaway
In Modern Portfolio Theory, traders aim to achieve an optimal mix of assets that balances the potential for high returns with acceptable levels of risk despite the inherent volatility of the cryptocurrency market.