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Introduction Portfolio theory examines the relationship that exists between risk and return when investing in equities. Based upon the pioneering work of Markowitz, it is explained how a rational investor in an efficient capital market, requiring an optimal portfolio of investments, can maximize utility, having regard to the relationship between returns and risk associated with their covariablity of returns, within portfolio (Hill, 1998). This assignment is designed to test some of the theoretical concepts of portfolio theory and to examine how investment decisions in practice, could be influenced and improved by application of the theory. Therefore, we will look at the effects of risk reduction, firstly by modeling equities from 3 specific sectors within UK and then by introducing 8 international equities to the portfolios. The risk/return relationship will be further examined by the application of the Capital Market Line. Low risk sector There are two specific reasons why this report has chosen...

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