Portfolio theory

In Chapter 2 we discussed how to measure the most important characteristics of a security, its return and its risk. We decided that, for each security, investors would compare the expected return from a range of probable outcomes with the risk of the security, as measured by the standard deviation of the probability distribution of returns.1 So, investors would only need to consider expected returns and standard deviations when choosing securities for their investment portfolios. They would, since they were assumed risk averse, choose those securities which offered the most return for a given level of risk or the least risk for a given level of return.