Author: Gediminas Rickevičius

There exists a classic example explaining the Modern Portfolio Theory (MPT) in finance. It goes thus: there are only two businesses on a small island, one selling umbrellas and the other sunglasses. On that island there are always, on average, 6 months of dry and wet season with profits of both companies depending on the weather. However, neither season is possible to predict in advance. Which company should you invest in? MPT says you should invest in both to get the same return but without any volatility. Modern Portfolio Theory has often been criticized for being an extreme simplification of…