Markowitz portfolio theory

Investors base investment decisions on expected risk and return, and prefer higher returns to lower returns and lower risk to higher risk.

Assumptions:
· Prefer lower risk for the same level of expected return
· Risk in terms of an investment's variance or standard deviation.
· Investment expected return and probability of the returns over a period is quantifiable
· Investors make decision based on an investment's risk and return, therefore, an investor's utility curve is based on risk and return.

Markowitz’s efficient frontier
The curve represents the set of portfolios that have the highest expected return for a given level of risk and the least risk for a given level of expected return (in terms of standard deviation)

While an efficient frontier illustrates each of the efficient portfolios relative to risk and return levels, each of the efficient portfolios may not be appropriate for every investor.