Portfolio Theory

The daily price change of an average stock is approximately normally distributed. Based on this given, [Markowitz] developed Portfolio Theory (heavily criticized by Taleb in The Black Swan: The Impact of the Highly Improbable). The basics of portfolio theory is that you can minimize the risk of an investment by spreading the investment over multiple securities. If you select multiple projects and plot risk and return in the same graph:

You want to move 'up' for better returns and 'left' for lower risk. The left/top most line denotes the portfolio mix which maximizes return for the lowest risk. Any portfolio along this line is called an efficient portfolio.