To validate the importance of diversification, Nobel Prizewinner, Harry Markowitz, developed an economic theory called Modern Portfolio Theory, which mathematically quantifies why and how diversification works to reduce risk for investors. In addition, Harry Markowitz established the concept of an efficient frontier, which graphically illustrates efficient portfolios that have the smallest attainable portfolio risk for a given level of expected return, or the largest expected return for a given level of risk.
Take a moment and review the chart below that illustrates the Efficient Frontier.
