Modern Portfolio Theory

This problem tests your understanding of how investors think about portfolio construction, diversification, and the tradeoff between risk and return. In an investment banking interview, you are expected to explain that portfolio risk is not just the sum of each asset’s standalone risk, but also depends on how the assets move together, which is why correlation, variance, and diversification matter.

Interviewers ask this to see whether you can discuss efficient portfolios, the efficient frontier, and the difference between systematic and unsystematic risk in a clear, analytical way. It also checks whether you understand why adding assets with different return patterns can improve a portfolio’s risk profile and why market exposure remains important even after diversification.