Behavioral Funds

Finance allah shmoop what is modern portfolio theory All right

basic idea Here people Diversification is good Dig it right

C d i g there that's modern Alright let's goto

a gn modern like when hunk and invested from their

cave Well they just invested in good rocks or spears

and really didn't worry about much else And well math

hadn't really been invented yet So like who knew that

If all right well then along came harry markowitz in

nineteen fifty two who tried to science and math the

crap out of the stock market What he came up

with was modern portfolio theory which basically said that there

was a smarter way to invest than just you know

putting your life savings into blockbuster because you like the

logo using all sorts of advanced metrics that we won't

torture you with here The theory he devised was that

well rather than throwing your money against the wall to

see what sticks you could use extensive elaborate data to

determine the best way to maximize your returns depending on

how much risk you were willing Teo you know risk

And there are five key ideas behind modern portfolio theory

And yes of course we have videos on each of

these The first is alfa which is kind of like

how smart you are in the market Then there's beta

which is about volatility in a broadway The vics we

got a whole video set on that Then they're standard

deviation and no that's not some kinky reference to fifty

shades It's more about how the market diverges from your

given individual stock pick and volatile things are finally the

beta then there's our squared it's all about how a

stock or a given index conforms to a given line

or expected return ratio Like how close it is how

proximate is And then finally you have the sharpe ratio

Thank you bill sharp from stanford university who also talked

about being smart in the market so that you could

evaluate your rich turns whether they were smart or just

a lottery ticket Lucky Oh and we're probably not such

a wise investment in the beginning even though they turned

out okay That would be sort of the sharpe ratio

Yeah all right Well in general mpt skews toward less

risky investments but it all comes down to risk reward

Tolerance in the end if for whatever reason you feel

supremely confident that radio shack is about to make a

massive come back well you might be able to justify

taking more risk in loading the dice But to be

clear radio shack was just a bad example So kids 00:02:33.29 --> [endTime] don't try this at home