| Abstract : | Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. So, there is always a risk/return trade-off in investing. Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives, which may be determined by utility theory. An investor's utility is hard to measure. However, we can determine it indirectly with behaviour theories, which assume that people will strive to maximize their utility. Utility is a concept that was introduced by Daniel Bernoulli who believed that for the usual person, utility increased with wealth but at a decreasing rate. Moreover, Bernoulli stated that an investor's acceptance of risk should incorporate not only the possible losses that can occur, but also the utility, or intrinsic value, of the investment itself.So, investing is a trade-off between risk and return. In general, assets with higher returns are riskier. For a given amount of risk, Modern Portfolio Theory describes how to select a portfolio with the highest possible return. Or, for a given return, Modern Portfolio Theory explains how to select a portfolio with the lowest possible risk. According to the theory, it's possible to construct an "Efficient Frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. Modern Portfolio Theory takes this idea even further. It suggests that combining a stock portfolio that sits on the efficient frontier with a risk-free asset, the purchase of which is funded by borrowing, can actually increase returns beyond the efficient frontier. Modern Portfolio Theory is one of the most important and influential economic theories dealing with finance and investment. It was developed by Harry Markowitz and published under the title "Portfolio Selection" in the 1952 Journal of Finance.In this work, the above theoretical analysis is followed by some practical examples of finding the risk aversion coefficients as well as the optimal portfolios of the efficient frontier for a group of real assets.
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