Modern Portfolio Theory
Modern Portfolio Theory (MPT) suggests that thinking in portfolio terms is better from a risk-return profile than doing so in terms of individual securities. One can use expected returns and volatility of various combinations of securities to determine which provide optimal riskâ€“reward scenarios. These portfolios can be plotted out, creating the efficient frontier. The investor should select a portfolio on that frontier. This can be extended by the use of leverage, leading to the formation of the capital market line and so-called "super-efficient" portfolios.
Most traders â€” when thought of as speculators rather than investors â€” do not think in terms of portfolios in this fashion, however.
 See also