Investing · Lesson Plan
Modern Portfolio Theory
Why don’t smart investors put everything in one stock? Modern portfolio theory, introduced by Nobel laureate Harry Markowitz, explains how to build portfolios that earn the highest return for a given level of risk. This lesson covers the core ideas — expected return, risk, diversification, and the way combining assets can lower overall risk — and the assumptions behind the model.
For Teachers
Lesson at a glance
- Topic
- Investing
- Grade Level
- Grades 11–12 / College
- Resource Type
- Lesson + Worksheet
- Estimated Time
- 45–60 minutes
- Format
- Lesson + worked examples
- Materials
- Printable lesson, worksheet, pencils
What Students Learn
Learning objectives
- Explain the goal of modern portfolio theory
- Define expected return and risk for an investment
- Describe how diversification reduces risk
- State the key assumptions of the Markowitz model
- Apply the ideas to a simple two-asset portfolio
Materials
What you’ll need
- Printed lesson and worked examples (one per student)
- Calculator
- Pencils
Key Terms
Vocabulary
- Portfolio
- A collection of investments held together.
- Expected return
- The average return an investment is expected to earn.
- Risk
- The chance that returns differ from what’s expected.
- Diversification
- Spreading investments to reduce overall risk.
- Efficient portfolio
- The best return for a given level of risk.
- Correlation
- How two investments’ returns move together.
For Teachers
Lesson plan
Estimated time: one 45–60 minute class period.
Lesson sequence
- The big idea (10 min). Markowitz and getting the most return for the least risk.
- Return & risk (15 min). Expected return and risk for individual assets.
- Diversification (12 min). How combining assets can lower overall risk.
- Worked examples (11 min). Students analyze a simple two-asset portfolio.
Assessment
Assess the worked examples for correct return/risk reasoning and a sound diversification argument.
Discussion
Discussion questions
- What is the goal of modern portfolio theory?
- How do you measure an investment’s risk?
- Why does diversification reduce risk?
- What is an efficient portfolio?
- Why not invest everything in the highest-return asset?
Printable Lesson & Worksheet
Modern Portfolio Theory — Lesson & Worked Examples
A printable advanced-finance lesson on modern portfolio theory: expected return, risk, diversification, and building an efficient portfolio.
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