This Note inspiered by comments to the good SA article "Larry Swedroe (Passively) Positions For 2012: Avoiding Stock And Sector Picking, Economic Forecasting, And All Other Forms Of Speculation"
Modern portfolio theory (MPT) is cornestone of traditional finance. I'm a simple minded person. To me MPT is an attempt to show that "investing is a tradeoff between risk and expected return" (bit.ly/yxHZ1z). According to the same source (bit.ly/xeb0c0) "In finance, risk is the probability that an investment's actual return will be different than expected." If I combine these 2 definition I get investing is a tradeoff between real and expected returns. Hence, if my real return is equal to my expected return I do not invest.
Let me give an example. When I buy a stock at 10$ and decide to sell it at 25$ my expected return is 15$. When later on I indeed sell the stock at 25$ my real return is 15$. Fine I happy with 15$ and because I did not invest according to the definitions.
Aliluya, now I know that to tell IRS about my capital gains !!!!
Well return can be measured (15$) and risk is not. So the MPT attempt is not successful (at least for me as a physicist). OK, at least do not call it " theory ".
BTW, the discussion and article (see seekingalpha.com/article/315875-larry-sw...) are quite good.