Analyzing Modern Portfolio Theory (MPT) in Corporate Finance

This report examines Modern Portfolio Theory (MPT) within the context of corporate finance. It explores the relevance of incorporating risk into strategic financial management, critically analyzes the limitations and criticisms of MPT, and discusses the consequences of its application in corporate settings. The report investigates the theoretical possibilities and limitations of MPT in corporate management, addressing its strengths and weaknesses. The analysis is based on existing literature and aims to provide a comprehensive understanding of MPT's role in corporate financial decision-making, resource allocation, and risk management, with a focus on strategic implications. The report also considers the potential for integrating risk as an integral part of the strategic decision-making process. The report provides a detailed analysis of MPT's application and challenges in corporate finance.

BA6325 - CORPORATE FINANCE COURSEWORK
ACADEMIC YEAR 2016-17
Modern Portfolio Theory (MPT)
For nearly 45 years now (since the 1970’s) the management of an institution’s portfolio of
activities has been a focal point of strategic financial management. In this domain, the
concepts developed mostly centre on or around the success of investment prospects, resource
allocation and security selection. As a consequence, the risk management of companies has
also gained considerable notice in recent years especially after the recent financial crisis.
Some have argued though, that risk management systems, focus solely on conformity,
financial and operational risks, and as such they largely discount the risks of corporate
strategic decision making. Such critics have also argued that Modern Portfolio Theory (MPT)
can also be viewed as a framework that can be utilised to fill this gap and integrate risk as an
integral part of the strategic decision-making process of corporate portfolio management.
Based on the existing knowledge and literature regarding the association between strategy
and risk, you are required to perform a theoretical study of the purpose of key concepts and
relationships of MPT in a corporate financial management environment. More specifically,
you are required to develop an exposition of:
- The relevance of incorporating risk in strategic financial management
- Criticisms and limitations of the Transferability of Modern Portfolio Theory
- Consequences of this (often considered) inconclusive relationship
- The theoretical possibilities and limitations of MPT in a corporate management
context
The purpose is to expose and critically discuss the potential strengths and weaknesses of such
a framework’s applicability.
- Deadline: This is to be submitted during the Enrichment Activity Week,
Thursday 16 February 2017 by 9am strictly (late submissions up to seven days
will be capped at 40%, zero otherwise).
- Word limit: 2,000 words maximum
- All students are required to submit to turn-it-in
- You are advised to demonstrate extensive reading over a wide range of sources
so as to demonstrate an understanding of the theory as well as its implications.