A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Also called "portfolio theory" or "portfolio management theory."

Investopedia Says:
According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.

There are four basic steps involved in portfolio construction:
-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

Related Links:
See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. Modern Portfolio Theory: Why It's Still Hip
This rate is rarely questioned - unless the economy falls into disarray. How Risk Free Is The Risk-Free Rate Of Return?
Learn the strengths and weakness of passive and active management for uncovering the overall market's worth. The Quest For True Value
These funds trade like stocks, provide diversification, reduce risk and increase returns. How To Pump Up Your Portfolio With ETFs
Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it. Improve Your Investing With Excel
Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving it. Achieving Optimal Asset Allocation
Achieve analytical efficiency by applying your evaluation to a key set of stocks. Equity Portfolio Management Mechanics
Harry Browne believes his "permanent portfolio" theory is the ideal long-term investing strategy. Permanent Portfolio Locks In Long-Term Profits
Hedging against currency risk can add a level of safety to your offshore investments. Protect Your Foreign Investments From Currency Risk
If you diversify too much, you might not lose much, but you won't gain much either. The Dangers Of Over-Diversifying Your Portfolio

Copyright ©2010, Investopedia.com - Owned and Operated by Investopedia US, A Division of ValueClick, Inc. All rights reserved.