The theory that holds that assets should be chosen on the basis of how they interact with one another rather than how they perform in isolation. According to this theory, an optimal combination would secure for the investor the highest possible return for a given level of risk or the least possible risk for a given level of return. Although individual investors can use some of the ideas of portfolio theory in putting together a group of investments, the theory and the literature relating to it are so complex and mathematically sophisticated that the theory is applied primarily by market professionals. Also called modern portfolio theory.
