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 Dow Theory?10 Views
Finance allah shmoop what is dow theory Well it's a
push me pull you index Yeah like you know the
doctor do little lama thing with the overall average of
the dow thirty stocks here and the dow jones transport
index here where one goes well generally the other follows
that is they are highly correlated in price and one
is basically an indicator of where the other is heading
Why Well originally the dow transports were railroads which appalled
all the crap that the dow industrials made so you'd
think that one would follow the other And if the
push me pull you thing didn't work for you well
take a short look at this caterpillar crawling you know
like that one part goes forward and then the other
follows Well dow theory is one of a good gillian
black box crystal ball theories that charters tried to use
to predict how the stock market would run in the
future so that they could profit from those predictions And
like all other black box theories they work sometimes even
very nicely for a while with high prediction levels That 00:01:08.293 --> [endTime] is well until they don't No
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