What is the two-moment decision model?

It's a system that predicts the result of a decision where the decision-maker is faced with random variables whose outcome is unknown, as is the case with an investment. Choices are made based on knowledge of 'two moments' of these random variables.

Where have you heard about the two-moment decision model?

The most well-known two-moment decision model is the modern portfolio theory, which suggests that the best way to increase return on an investment portfolio is by diversifying.

What you need to know about the two-moment decision model.

The two moments of a decision model are almost always the mean, or expected value, and the standard deviation, which measures the spread of numbers in a set of data from its mean.

In modern portfolio theory, it’s expected there will be risk with any investment. The idea is to maximise the return given a certain level of risk – usually a deviation from the mean price.

Find out more about the two-moment decision model.

Read our definitions of modern portfolio theory and decision model.