portfolio theory

portfolio theory
A branch of financial economics associated with Harry M. Markowitz (born 1927) that analyzes the *diversification of *risk through the holding of a *portfolio of investments. A major assumption underlying portfolio theory is that investors are *risk-averse by nature, yet they desire high *returns on their investments. Investors therefore expect higher *returns from higher risks, and they aim to hold efficient portfolios of investments in line with their *risk appetites. An efficient portfolio of investments is one that gives the highest possible return for a specific level of risk, or the smallest possible level of risk for a specific expected return. Efficient portfolios of investments generally benefit from the spreading of risk through *diversification, but in any portfolio there is an element of risk that cannot be diversified away: this is known as *systematic risk.

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