Modern Portfolio Theory (MPT), introduced by Harry Markowitz in 1952, remains a cornerstone of investment strategy. The theory shows that diversification can reduce portfolio risk by combining assets that are not perfectly correlated. The efficient frontier represents optimal portfolios offering the highest expected return for a given level of risk.
Risk management practices have evolved to include value at risk (VaR), stress testing, and scenario analysis, helping institutions understand tail risks and prepare for market disruptions.