Portfolio Theory

Modern Portfolio Theory is a framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It emphasizes that the risk of an individual asset should not be assessed in isolation but rather by how it contributes to the overall portfolio's risk and return.

By diversifying across assets that are not perfectly correlated, investors can reduce total portfolio risk. In the context of cryptocurrency, this means combining assets with different volatility profiles or adding uncorrelated assets like stablecoins.

The theory relies on the concepts of mean, variance, and covariance to optimize asset allocation. It is the bedrock of institutional investment strategy and is increasingly applied to crypto-asset management.