The Role of Portfolio Theory in Risk Management and Investment Decision Making

Abstract

This article discusses the important role of portfolio theory in the context of risk management and investment decision making. Portfolio theory, introduced by Harry Markowitz in 1952, has become a major foundation in the world of finance. The basic concept of this theory regarding asset diversification to achieve a desired level of return with acceptable risk, provides a strong scientific foundation in risk management and investment decision making. In this article, we review the basic concepts of portfolio theory, diversification strategies, and their application in managing risk holistically. In addition, this article also discusses how portfolio theory helps investors make more informed investment decisions by analyzing risks and returns rationally. Based on previous research, we also explore the contribution of portfolio theory in creating company value and provide practical guidance for investors in forming efficient portfolios. Thus, this article provides a more comprehensive understanding of the relationship between risk, investment, and company value as well as the importance of portfolio theory in achieving financial goals.