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A framework developed by Harry Markowitz that demonstrates how rational investors can construct portfolios to maximize expected return for a given level of risk through diversification.
MPT, for which Markowitz won the 1990 Nobel Prize in Economics, formalized the concept that portfolio risk depends not just on individual asset risks but on how assets move together (correlations). The "efficient frontier" represents the set of portfolios offering the highest return for each level of risk. Any portfolio below the efficient frontier is suboptimal because a higher return could be achieved at the same risk level. MPT is the theoretical foundation for asset allocation, diversification, and the development of index funds. Critics note that MPT relies on assumptions (normal distributions, stable correlations) that often break down during crises.