# A Gentle Introduction to Modern Portfolio Theory (MPT)

## A Mathematical take on: “Don’t Put All Your Eggs in One Basket”

You probably heard your grandma saying:

Don’t put all your eggs in one basket.

It sounded like a good advice, but let’s be honest, will you base your investment strategy on a saying?

**Why split your bets on Apples and Oranges, if clearly the price of the Apples stock is skyrocketing?**

The key is to think in terms of both risks and returns. It’s easy to focus solely on returns. Returns is the obvious one we all know here.

I look at a stock’s price, notice it’s up by 10% from last year, and think, “Cool, I made 10%!” But then, what about the risk? What’s that all about?

The missing piece here is how certain are you that this stock will continue to go up by another 10% next year? What about the next five years?

*This level of certainty, or rather the lack thereof, is what we call risk.*

In this post, I’ll break down the Modern Portfolio Theory and detail a simple formula for analyzing risk and returns, to show you — in mathematical terms — why…