Investors suffered substantial portfolio losses during the recent market crash caused by the economic impacts of...

Investors suffered substantial portfolio losses during the recent market crash caused by the economic impacts of COVID-19. Explain whether these losses could have been avoided by applying Modern Portfolio Theory.

Expert Solution

Modern portfolio theory is focused at optimisation of portfolio through appropriation of investment into different stocks which will be giving an absolute diversification to the portfolio and which will be reducing the significant risk in the portfolio in order to maximize the overall return.

No, I think that these losses could not have been avoided by applying modern portfolio theory because these were the losses which arose out of systematic risk into the overall economy, and this can never be eliminated into the portfolio, even if it is highly diversified so this is not about diversification of portfolio but this is about systematic risk which can never be diversified, even if modern portfolio theory is to be adopted and there is no probability of management of the portfolio under such circumstances where there would be absolute bloodbath because of the changes in the fundamentals of the macro economy which were triggered by the health crisis.

Modern portfolio theory can only help in minimization of the loss, but in such situation when the complete economic structure has changed , modern portfolio theory can not help in gaining through such situations so this can help in outperformance related to the market but portfolio would have still been down even after application of modern portfolio theory.

jeff jeffy answered 1 year ago

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