# portfolio theory

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## Portfolio theory

See: Modern portfolio theory.

## Portfolio Theory

## portfolio theory

The theory that holds that assets should be chosen on the basis of how they interact with one another rather than how they perform in isolation. According to this theory, an optimal combination would secure for the investor the highest possible return for a given level of risk or the least possible risk for a given level of return. Although individual investors can use some of the ideas of portfolio theory in putting together a group of investments, the theory and the literature relating to it are so complex and mathematically sophisticated that the theory is applied primarily by market professionals. Also called

*modern portfolio theory*.## portfolio theory

the study of the way in which an individual investor may achieve the maximum expected return from a varied PORTFOLIO of FINANCIAL SECURITIES which has attached to it a given level of risk. Alternatively the portfolio may achieve for the investor a minimum amount of risk for a given level of expected return. Return on a security consists of INTEREST or DIVIDEND, plus or minus any CAPITAL GAIN or loss from holding the security over a given time period. The*expected*return on the collection of securities within the portfolio is the weighted average of the expected returns on the individual INVESTMENTS that comprise the portfolio. However, the important thing is that the risk attaching to a portfolio (its variability) is smaller than the variability of each individual investment. See CAPITAL ASSET PRICING MODEL, EFFICIENT MARKET HYPOTHESIS, UNCERTAINTY.

## portfolio theory

the study of the way in which an individual investor may theoretically achieve the maximum expected return from a varied PORTFOLIO of FINANCIAL SECURITIES that has attached to it a given level of RISK. Alternatively, the portfolio may achieve for the investor a minimum amount of risk for a given level of expected return. Return on a security comprises INTEREST or DIVIDEND, plus or minus any CAPITAL GAIN or loss from holding the security over a given time period. The*expected*return on the collection of securities within the portfolio is the weighted average of the expected returns on the individual INVESTMENTS that comprise the portfolio. The important thing, however, is that the risk attaching to a portfolio is less than the weighted average risk of each individual investment. See also EFFICIENT-MARKETS HYPOTHESIS, RISK AND UNCERTAINTY.

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