What Modern Portfolio Theory says — diversification reduces risk without reducing expected return

What the efficient frontier is — the set of portfolios with maximum return for each risk level

The efficient frontier represents optimal portfolios with highest returns for given risk levels

What the Markowitz mean-variance optimization does — finds the portfolio with minimum variance for a given return

Determines optimal asset allocation for desired return with minimal portfolio risk

How does the concept of leverage in financial markets influence the risk-return tradeoff for investors?

Leverage amplifies potential returns but also increases risk exposure in financial markets

What the Sharpe ratio measures — excess return per unit of risk: (R - Rf) / σ

Sharpe ratio: Excess return per standard deviation of portfolio returns

What recency bias does — overweighting recent events in investment decisions

Recency bias leads investors to prioritize recent market trends over long-term historical data

What the risk parity approach does — allocates based on risk contribution, not capital allocation

Risk parity distributes capital proportionally to each asset's risk contribution