A portfolio is a grouping of financial assets, which may include stocks, bonds, and mutual funds. It is generally accepted that a portfolio is designed based upon an investor's risk tolerance, time frames, and investment goals. The allocation of the assets in a portfolio, referred to as asset allocation, influences the risk/reward ratio of the portfolio. The specific assets in a portfolio and the relative weighting of the assets within the portfolio are designed to maximize the expected return, while also minimizing the risk.

The process of determining the proper assets and their proportion relative to each other within a portfolio involves a concept known as modern portfolio theory (MPT). This is a theory in finance that has evolved since the 1950s and describes the mathematics of constructing an optimal portfolio based upon risk and return parameters. This involves selecting assets that are correlated based upon historical returns, in such a manner that they...