Modern portfolio theory and diversification

Modern portfolio theory represents the most significant innovation in the 20th century in the field of investment and securities portfolio management. Before the modern portfolio theory it was believed that each share is to be analyzed by means of fundamental analysis and that only those shares having growth potential should be included in the portfolio. Modern portfolio theory was the first to offer a general approach to securities portfolio management. It ensured a uniform platform for monitoring and assessment of individual investments. The concept is theoretically simple and empirically proven as reliable, in normal market conditions. The objective of this paper is to indicate the usefulness of modern portfolio theory implementation, as well as its limitations in transition markets.