Portfolio theory is a complex approach to investment that attempts to maximize the return for any given level of risk. Also known as modern investment theory or modern portfolio theory, the premise contends that the risk of any particular stock should be evaluated by looking at how that stock’s price correlates to variation in the market portfolio (a portfolio made up of all assets in a market, each held proportionately to their value in the market). Using portfolio theory, an investor seeks to uncover how and if an asset interacts with others, rather than how it performs individually.
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