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Finance GlossaryModern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT)
Definition of Modern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT) is an investment framework that focuses on maximizing returns for a given level of risk through diversification. It suggests that combining assets with different risk and return characteristics can reduce overall portfolio risk, rather than evaluating investments in isolation.
Related Terms
Go Public
To “go public” or going public means to get listed on the stock market by launching an Initial Public Offering (IPO). The act of going public involves receiving approval from existing stakeholders to launch an IPO, the price of which is decided by two methods:
- Book Building
- Fixed price
Once the price of the IPO is decided, the shares are offered to the public on the primary market. Not everyone who applies to an IPO may get shares - the system works on the basis of allotment. After the shares are issued, the company is said to move from the “go public” stage to the publicly traded company stage.
Adjusted Futures Price
An adjusted futures price shows the cost of purchasing, financing, and delivering the underlying assets of a futures contract.
The adjusted futures price is calculated by multiplying the price of the underlying asset by the number of units to be delivered (known as the conversion factor).
The adjusted futures price is calculated by multiplying the price of the underlying asset by the number of units to be delivered (known as the conversion factor).
Passive Investing
Passive Investing is an investment strategy where the goal is to mimic the performance of an index representing a broad market, as opposed to attempting to beat the market through active stock picking or market timing. The purpose is to have market returns with minimum costs. This strategy is implemented mostly in Index Funds and exchange-traded funds (ETFs). Passive investing is characterised by low expense ratios and steady performance in the long term, thus avoiding potential human error or poor fund manager decisions.
Out of the Money (OTM)
An option contract is said to be out of the money (OTM) if it would not be profitable to exercise the contract immediately. Options with no intrinsic value; call options with a strike price higher than the current market price, or put options with a strike price lower than the market price. OTM options are less expensive than ITM options. Indian F&O traders often purchase OTM options for leveraged bets, though they expire worthless if the market doesn't move favourably.
Mutual Fund Sahi Hai
Mutual Fund Sahi Hai is a popular investor awareness slogan/website launched by the Association of Mutual Funds in India (AMFI). It aims to educate people about mutual funds and encourage informed, long-term investing by highlighting the benefits of diversification, professional management, and disciplined investment habits.
Follow On Public Offer
A Follow On Public Offer or FPO allows a publicly traded company to issue more stock to public investors. FPOs are similar to IPOs because FPOs allow companies to raise additional capital through the public market.
For an FPO to be possible, a company must have already done an IPO. FPO shares are typically issued at a discount by a company whose track record is already clear because they are publicly traded.
For an FPO to be possible, a company must have already done an IPO. FPO shares are typically issued at a discount by a company whose track record is already clear because they are publicly traded.
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