The core principle of modern portfolio theory dictates that investment risk is mitigated through diversification across multiple asset classes and geographical regions, a mechanism formally characterized by the absence of correlation between assets which lowers overall volatility without diminishing expected returns. This strategy relies on low-cost index funds as vehicles to implement broad market exposure while minimizing transaction costs, adhering to Efficient Market Hypothesis frameworks that assert stock picking provides no informational advantage. The theoretical domain is financial economics, specifically behavioral and investment finance, where diversification serves as a rule-based mechanism to counteract individual investor cognitive biases such as home-country bias or employer-specific overexposure.
The core principle of modern portfolio theory dictates that investment risk is mitigated through diversification across multiple asset classes and geographical regions, a mechanism formally character…