RISK MEASUREMENT IN POSTMODERN PORTFOLIO THEORY: DIFFERENCES FROM MODERN PORTFOLIO THEORY

Abstract

In the context of financial crises, risk measurement remains a critical subject of interest among both investors and financial scholars. The standard deviation, widely employed within the framework of Modern Portfolio Theory MPT, has traditionally been used as the principal tool for quantifying investment risk. However, this measure has been increasingly criticized for its inability to reflect actual investor behavior and expectations.

Postmodern Portfolio Theory PMPT was developed to address these limitations by emphasizing downside risk—representing the likelihood of returns falling below a minimum acceptable threshold—as a more realistic assessment of investment risk. Furthermore, PMPT accounts for non-normally distributed returns and aligns more closely with the behavioral tendencies of modern investors. This research examines the theoretical and empirical differences between MPT and PMPT under highly volatile market conditions. The findings suggest that PMPT may outperform or underperform MPT depending on the scenario, while its principles remain consistent with the theoretical framework discussed throughout the study. The application of PMPT allows investors to better distinguish between the genuine risk of receiving returns below expectations and the excess returns premium obtained from bearing additional risk in pursuit of superior performance.