{"id":1999,"date":"2019-10-01T13:29:00","date_gmt":"2019-10-01T13:29:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1999"},"modified":"2026-03-17T20:49:45","modified_gmt":"2026-03-17T20:49:45","slug":"portfolio-approach-investing","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/","title":{"rendered":"Portfolio Approach to Investing"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Portfolio Management: An Overview (2025 Level I CFA\u00ae Exam \u2013 PM \u2013 Module 1)\",\n  \"description\": \"This video lesson covers the portfolio approach to investing, outlining the portfolio management process and types of investors with their unique needs. It explains defined benefit vs. defined contribution pension plans, explores the asset management industry, and compares mutual funds with other pooled investment products to support effective investment decision-making.\",\n  \"uploadDate\": \"2022-06-30T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/ILj5hT_N3TU\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=ILj5hT_N3TU\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/ILj5hT_N3TU\",\n  \"duration\": \"PT50M54S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What benefit does a portfolio approach to investing provide?\",\n    \"text\": \"A portfolio approach to investing provides which of the following benefits?\\n\\nA. The highest investment returns.\\n\\nB. Protection against investment losses.\\n\\nC. A reduction in risk during normal market conditions.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. A diversified portfolio approach helps reduce risk during normal market conditions by spreading investments across a variety of assets. While diversification can lower risk, it does not necessarily guarantee the highest returns or protect completely against investment losses during major market downturns.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p>\n  <iframe loading=\"lazy\"\n    src=\"\/\/www.youtube.com\/embed\/ILj5hT_N3TU\"\n    width=\"611\"\n    height=\"343\"\n    allowfullscreen=\"allowfullscreen\">\n  <\/iframe>\n<\/p>\n\n\n\n<p>Investors have to ensure their investments <b>achieve their future needs<\/b>. A <b>portfolio approach<\/b> to investment decision-making is important regardless&nbsp;of future financial goals. It enables an investor to create a <b>diversified<\/b> investment portfolio.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Portfolio Diversification<\/strong><\/h2>\n\n\n\n<p>The benefits of a diversified portfolio are best summarized by the anecdotal wisdom of \u201cdon\u2019t put all your eggs in one basket.\u201d If a portfolio is too heavily allocated to one individual security, and that security fails for some reason, an investment portfolio can be reduced to zero. Diversification allows investors to spread some of the downside risk associated with any one investment position without necessarily decreasing the expected rate of return.<\/p>\n\n\n\n<div style=\"margin:24px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n       display:block;\n       width:100%;\n       text-align:center;\n       padding:16px 20px;\n       border:2px solid #2f5bff;\n       border-radius:50px;\n       background-color:#f5f7ff;\n       color:#2f5bff;\n       font-size:18px;\n       font-weight:500;\n       text-decoration:none;\n       line-height:1.3;\n     \">\n     Practice portfolio approach questions in our free trial.\n  <\/a>\n<\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Reducing Risk<\/strong><\/h3>\n\n\n\n<p>Diversified portfolios have a lower portfolio risk or volatility (as measured by standard deviation) than any individual position within the portfolio. Due to the statistical relationship or interactions between individual portfolio positions (correlation), the overall volatility is lowered by including multiple positions within a portfolio.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Composition Matters<\/strong><\/h3>\n\n\n\n<p>Each security has a historical risk and return profile. By combining securities within a portfolio, we can produce a risk and return profile for the portfolio itself. Through examination of different portfolios \u2013 allocating different percentages to the underlying securities \u2013 we can determine the portfolio composition that produces the best risk-return profile.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Downside Protection<\/strong><\/h3>\n\n\n\n<p>Portfolio diversification is not an absolute failsafe for investors. A diversified portfolio may not protect an investor from losses during market turmoil. The reduction in risk as a result of portfolio diversification comes about due to the uncorrelated nature of individual portfolio holdings. However, this correlation is not fixed. As was the case during the 2007-2008 financial crisis, previously uncorrelated assets can become correlated when markets are stressed. &nbsp;This is known as contagion, and in 2008, global assets experienced price declines. This proved that portfolio diversification is not as effective as the mathematical models had previously suggested.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>The Modern Portfolio Theory<\/strong><\/h3>\n\n\n\n<p>Although adopting a portfolio approach to investing seems intuitive, there is a theory behind it. The diversification concept follows the work of Harry Markowitz\u2019s 1952 publication and is known as Modern Portfolio Theory (MPT). The principle concept is that investors should not only hold portfolios but also focus on the relationship among the individual securities within the portfolio. MPT has its limitation but continues to be a cornerstone for portfolio managers.<\/p>\n\n\n\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>A portfolio approach to investing provides which of the following benefits? <\/p>\n<ol type=\"A\">\n<li>The highest investment returns. <\/li>\n<li>Protection against investment losses.<\/li> \n<li>A reduction in risk during normal market conditions.<\/li>\n<\/ol>\n<strong>Solution<\/strong> \n<p>The correct answer is C. <\/p>\n<p>A diversified portfolio reduces risk without compromising investment returns. However, it does not completely protect an investor against investment losses during times of market turmoil.<\/p><\/blockquote>\n\n\n\n<div style=\"text-align:center;margin:50px 0 30px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n       display:inline-block;\n       padding:14px 34px;\n       background:linear-gradient(135deg,#4a74d1,#3b66c4);\n       color:#ffffff;\n       font-size:18px;\n       font-weight:600;\n       text-decoration:none;\n       border-radius:50px;\n       box-shadow:0 6px 18px rgba(59,102,196,0.25);\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n       margin:18px auto 0;\n       max-width:620px;\n       font-size:16px;\n       line-height:1.6;\n       color:#333333;\n     \">\n     Strengthen your understanding of diversification and risk return tradeoffs with CFA Level I exam-style practice questions.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Investors have to ensure their investments achieve their future needs. A portfolio approach to investment decision-making is important regardless&nbsp;of future financial goals. It enables an investor to create a diversified investment portfolio. Portfolio Diversification The benefits of a diversified portfolio&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7],"tags":[],"class_list":["post-1999","post","type-post","status-publish","format-standard","hentry","category-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Portfolio Approach to Investing | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Portfolio Approach to Investing | CFA Level 1 - AnalystPrep\" \/>\n<meta property=\"og:description\" content=\"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-10-01T13:29:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-17T20:49:45+00:00\" \/>\n<meta name=\"author\" content=\"admin\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"admin\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\"},\"author\":{\"name\":\"admin\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\"},\"headline\":\"Portfolio Approach to Investing\",\"datePublished\":\"2019-10-01T13:29:00+00:00\",\"dateModified\":\"2026-03-17T20:49:45+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\"},\"wordCount\":473,\"articleSection\":[\"Portfolio Management\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\",\"name\":\"Portfolio Approach to Investing | CFA Level 1 - AnalystPrep\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-10-01T13:29:00+00:00\",\"dateModified\":\"2026-03-17T20:49:45+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\"},\"description\":\"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Portfolio Approach to Investing\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\",\"name\":\"admin\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g\",\"caption\":\"admin\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/admin\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/ILj5hT_N3TU\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"3055\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-10-01T13:29:00+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Portfolio Approach to Investing | CFA Level 1 - AnalystPrep","description":"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/","og_locale":"en_US","og_type":"article","og_title":"Portfolio Approach to Investing | CFA Level 1 - AnalystPrep","og_description":"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-10-01T13:29:00+00:00","article_modified_time":"2026-03-17T20:49:45+00:00","author":"admin","twitter_card":"summary_large_image","twitter_misc":{"Written by":"admin","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/"},"author":{"name":"admin","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251"},"headline":"Portfolio Approach to Investing","datePublished":"2019-10-01T13:29:00+00:00","dateModified":"2026-03-17T20:49:45+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/"},"wordCount":473,"articleSection":["Portfolio Management"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/","name":"Portfolio Approach to Investing | CFA Level 1 - AnalystPrep","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-10-01T13:29:00+00:00","dateModified":"2026-03-17T20:49:45+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251"},"description":"Learn the principles of Modern Portfolio Theory (MPT), portfolio diversification, and how they impact investment decisions.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/portfolio-approach-investing\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Portfolio Approach to Investing"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251","name":"admin","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g","caption":"admin"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/admin\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/ILj5hT_N3TU","og_video_type":"text\/html","og_video_duration":"3055","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-10-01T13:29:00+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1999","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=1999"}],"version-history":[{"count":37,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1999\/revisions"}],"predecessor-version":[{"id":59738,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/1999\/revisions\/59738"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=1999"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=1999"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=1999"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}