Modern Portfolio Theory

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The Modern Portfolio Theory is the theory currently guiding the prudent investor rule for trust administration by the trustee. Under the Modern Portfolio Theory, prudence is evaluated not by investment strategy on individual investments but by the portfolio as a whole. Under the former prudent person rule, there was no duty to diversify. Judges would analyze each investment decision and decide if it was prudent or speculative based on that single investment. The Modern Portfolio Theory judges the prudence of a particular investment on how it fits in with the rest of the portfolio. The objective is to manage risk to determine the appropriate level of risk in light of the objectives of the particular trust.

See also: Harvard College & Massachusetts General Hospital v. Armory (1830)

[Last updated in July of 2023 by the Wex Definitions Team]