What is the goal of modern portfolio theory?

The goal of modern portfolio theory is to maximize expected return based on market risk levels. This approach seeks to optimize the return on an investment portfolio while considering the inherent risks associated with different assets. By analyzing the relationship between risk and return, investors can identify the most efficient frontier of portfolios, which offers the highest expected return for a given level of risk.

Modern portfolio theory emphasizes the benefits of diversification, which allows investors to reduce the overall risk of their portfolio without necessarily sacrificing potential returns. It recognizes that different asset classes do not move in tandem, and by mixing various asset types, investors can better manage volatility and potential losses in their overall investment strategy. Therefore, the theory provides a structured way to allocate assets to achieve the desired risk-return profile effectively.

In contrast, the other potential answers do not capture the essence of modern portfolio theory. Focusing solely on maximizing returns without considering market risk does not align with prudent investment strategies, as it could lead to excessive risk-taking. Creating a diversified portfolio with no risk is unrealistic; all investments carry some level of risk, and diversification can only help in reducing that risk but not eliminate it entirely. Lastly, minimizing costs is an important aspect of investment management but does not relate specifically to the risk-return trade-off central to