August 24, 2025Open Access

Modern Portfolio Theory: Variance, Covariance, and the Mathematics of Diversification

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Observational analysis highlights variance and covariance in investment strategies, suggesting MPT's limitations during downturns.

MPT emphasizes reducing risk through diversification, and effectively utilizes variance and covariance to manage portfolio volatility.
The theory demonstrates a negative correlation among assets that helps minimize overall portfolio risk, yet exposes flaws in turbulent market conditions.
Analysis includes historical data reliance and compares MPT to alternatives like AI and Digital Portfolio Theory, emphasizing adaptability and responsiveness.
The results may enable improved investment strategies and highlight the need for embracing more dynamic frameworks in future investing.

C. F. M. de Lange (2025) studied this question.

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