a. Modern Portfolio Theory (MPT):
- Developed by Harry Markowitz, MPT uses mathematical optimization to select the best asset mix to achieve a desired return while minimizing risk. It involves calculations of expected returns, variances, and covariances of asset returns to construct the efficient frontier.
b. Asset Allocation:
- Mathematical models help determine the optimal allocation of assets in a portfolio. This involves solving optimization problems where the objective is to maximize returns for a given level of risk or minimize risk for a given level of return.
