Which concept is based on the idea that diversification can produce the same total returns for less risk?

Which concept is based on the idea that diversification can produce the same total returns for less risk?

• A. Efficient Market Hypothesis
• B. Modern Portfolio Theory
• C. Capital Asset Pricing Model
• D. Random Walk Theory

Answer: (B)

Diversification lowering risk while keeping the same expected return is a core result of Modern Portfolio Theory. This approach shows that by combining assets whose returns don’t move in lockstep, the overall portfolio variance can be reduced, even if each asset’s return remains the same on average. Through mean-variance optimization, you aim for the lowest possible risk for a given expected return, tracing the efficient frontier. That balance—achieving the same returns with less total risk through diversification—is exactly what Modern Portfolio Theory formalizes. The other concepts describe different ideas about markets or pricing, not this diversification-driven risk reduction.

Diversification lowering risk while keeping the same expected return is a core result of Modern Portfolio Theory. This approach shows that by combining assets whose returns don’t move in lockstep, the overall portfolio variance can be reduced, even if each asset’s return remains the same on average. Through mean-variance optimization, you aim for the lowest possible risk for a given expected return, tracing the efficient frontier. That balance—achieving the same returns with less total risk through diversification—is exactly what Modern Portfolio Theory formalizes.

The other concepts describe different ideas about markets or pricing, not this diversification-driven risk reduction.