Investment Theory Map: What Each Model Can—and Cannot—Tell Me

Read separately, investment theories can feel like repeated summaries. This page connects four frameworks through the decisions for which I actually use them. Each model simplifies reality; none selects a product or determines future returns on its own.

Framework	Question it addresses	What I use	What I do not assume
Modern Portfolio Theory	How does combining assets change risk?	Core diversification and correlation checks	That historical correlations will remain stable
CAPM	How are market risk and expected return connected?	Distinguishing beta from company-specific risk	That beta alone explains every expected return
Efficient Market Hypothesis	Why is persistent excess return from public information difficult?	A low-cost index core	That market prices are always exactly correct
Black Swans and the Barbell	How can a portfolio prepare for shocks outside a model?	Emergency reserves and limited satellite exposure	That a specific 90:10 mix guarantees a loss ceiling

How I connect the frameworks to a decision

1. Define the goal, horizon, and tolerable loss first. Cash flow comes before theory.
2. Use MPT and CAPM as a basic language for the risks created by combining assets.
3. Use EMH as one reason to keep the core simple and low cost.
4. Use Black Swan thinking to revisit survival conditions and risks missing from historical samples.
5. Check fees, taxes, liquidity, tracking difference, and account restrictions separately for the actual product.

The boundary between theory and practice

The purpose is to distinguish what each model explains from what it leaves out—not to package academic theory as an investment secret. See Asset Allocation and Investment Planning for my practical application.

Suggested reading paths

• If you are new to the subject: MPT → CAPM → EMH
• If you are focused on drawdowns and survival: Black Swans and the Barbell
• To see how theory changed my portfolio: Investment Evolution Prologue