There was “modern,” then “post-modern”...it’s only a matter of time before “post-post-modern” comes along.
But for now, let’s focus on PMPT: Post-Modern Portfolio Theory.
Regular old Modern Portfolio Theory (MPT) uses the mean variance of investment returns to optimize diverse portfolios. While MPT is considered a huge advancement in portfolio strategy and management, it’s got its limitations. For instance, the reason mean variance is used is because it’s supposed to be a proxy for investment risk. Plus, it has some statistical assumptions of a normal distribution, which isn’t always best. MPT does all right, but, hey...we can always do better, right?
In contrast, PMPT uses downside risk of returns, rather than mean variance, as a proxy for investment risk. For stat-nerds, that means they used the standard deviation of all returns, rather than just for negative returns, to measure risk. Where MPT assumes symmetrical risk, PMPT assumes asymmetrical risk. PMPT was a decades-in-the-making improvement to the revolutionary (but limited) MPT.
Now just waiting on the next iteration: PPMPT.
Related or Semi-related Video
Finance: What is the Greater Fool Theory...11 Views
Finance a la shmoop what is the greater fool theory? Oh shiny rocks, tulips,
Bitcoin.....The basic idea in the greater fool theory is
that you're a fool I'm a fool were all fools in the mosh pit [Man standing in a moshpit]
right here and we've all done and will continue to do stupid things like paying
$7,000 for a tulip one that just um you know sits there it doesn't speak it
doesn't divine the future just sits there nor does it guarantee lifetime you [Man eating a tulip]
know sexual prowess if you eat it it doesn't even reproduce in a particularly
virile manner, it's just a tulip well a short term store of wealth that one fool paid
7 grand for making the big bet that there's another fool even more motley
foolish who will pay 8 grand and in Holland a few hundred years ago there
was one clapping wooden shoe wearing blond paid 9 grand for this tulip and [Man carrying tulip]
then another even greater fool paid 10 grand and then another fool paid 11
grand and so on until this most foolish of all tulips sold for $26,000 then what
there another fool well no there wasn't then the flower stopped selling for
$26,000 and probably ended up selling for about 26,000 cents yeah there were
no more fools even greater than the ones that came before so the price plummeted [Person removes price label of tulip]
back to I don't know what was it 4 cents a tulip actually sold for for a normal
tulip back then it's about what it was intrinsically worth and well that was
all she wrote or germinated or whatever the greater
fool theory posits that there is always a greater fool out there to buy your
stuff at a higher and higher price until there isn't a greater fool out there
yeah it's sort of the game of hot potato where you benefit only by holding the [Woman and man juggling a hot potato]
potato usually a very short period of time before dumping its finger burning
love on to someone else who's foolish enough to catch it and the greatest
thing about the greater fool theory... Well we're a planet with lots and lots and
lots of fools...
Up Next
Modern Portfolio Theory claims there's a smart way to invest. If it's not "put all your money under your mattress," we might be doing it wrong...
What is the Efficient Markets Theory? The Efficient Markets Theory says that stocks trade at their fair value all of the time, assuming all informa...
What is the Dow Theory? Dow Theory is a collection of indicators and definitions of the types of market signals for indicating a Bull or Bear marke...