Modern Portfolio Theory

Modern Portfolio Theory is the study of the attempt to build an investment portfolio that has the maximum return for the minimum amount of equivalent risk.

The goal of highest return/lowest risk is achieved by the addition of several assets (or even asset classes) into the investment portfolio.  One of the simplest examples of this high return/low risk portfolio is a mixture of an equity portion (represented by an index such as the US S&P500) and low risk bonds (such as German bunds, UK Gilts, or US T-bills.)  The optimal percentage of each asset (equity and bonds) is achieved by calculating the diversification effects of each asset in the combined investment portfolio.