Modern portfolio theory is a theory on how risk-averse investors can construct portfolios to optimize expected return based on a given level of market risk.

The key principles are: (1) Diversification through investing in different kinds of assets that are not perfectly positively correlated reduces risk. (2) For a given risk level, investors seek to maximize returns. (3) Every possible portfolio can be plotted on a risk-return graph.

The efficient frontier represents the set of optimal portfolios offering the highest expected return for a given level of risk, or the lowest risk for a given expected return.

Systematic risk, also known as market risk, is the risk inherent to the entire market or market segment that cannot be eliminated through diversification.

Unsystematic risk, also known as specific risk, is the risk associated with a particular company or industry that can be reduced through diversification.

The CAPM describes the relationship between systematic risk and expected return for assets. It is used to price risky securities and generate expected returns for assets.

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an investor's goals, risk tolerance and investment horizon.

The main asset classes are equities, fixed income, cash and cash equivalents, real estate, commodities, and alternative investments.

Strategic asset allocation is a portfolio strategy that involves setting target allocations for various asset classes and periodically rebalancing the portfolio back to the original target allocations.

Tactical asset allocation is an active strategy that adjusts a portfolio's asset allocation away from the strategic benchmark to take advantage of market conditions and pricing anomalies that may exist in the short term.

The main purpose of rebalancing is to maintain the desired risk profile of the portfolio and prevent its asset allocation from drifting too far from the target allocations over time as asset class values fluctuate.

Value at risk (VaR) is a measure of the potential loss in value of a risky asset or portfolio over a defined period for a given confidence level.

Common risk management techniques include diversification, hedging strategies like futures and options, and risk budgeting.

Cash provides liquidity and serves as a buffer against portfolio losses. It also allows investors to take advantage of investment opportunities as they arise.

Dollar cost averaging is an investment strategy involving the investment of a fixed dollar amount into a target investment on a regular schedule, regardless of the share price.

International diversification can reduce portfolio risk because returns across countries tend to not be perfectly correlated. It also expands opportunity set.

Home bias refers to investors' tendency to over-invest in domestic assets despite potential benefits of international diversification.

Active portfolio management tries to beat the market through security selection and market timing. Passive management aims to replicate market returns by holding cap-weighted indexes.

Key factors include investment objectives, risk tolerance, investment constraints, tax considerations, time horizon, and unique investor circumstances.

Risk tolerance techniques include questionnaires, investor interviews, portfolio simulations showing potential gains/losses, and assessment of investor behavior.

A core-satellite portfolio has a core holding of passive investments tracking a market index, combined with satellite active investments seeking to outperform the market.

Tax-efficient investing involves strategies like asset location, tax-loss harvesting, and deferring taxes to manage the impact of taxes on investment returns.

Alternative investments include assets like hedge funds, private equity, real estate, commodities, etc. that exhibit low correlations with traditional assets.

A fund of funds is an investment strategy of holding a portfolio of different investment funds rather than investing directly in individual securities.

Smart beta investing uses rules-based strategies that blend active and passive styles. It tracks customized indexes different from traditional cap-weighted indexes.

ESG stands for investing incorporating environmental, social and governance factors into the portfolio construction process.

Leverage is the use of various financial instruments or borrowed capital to increase the potential return of an investment portfolio.

Style drift refers to when a portfolio's investment style deviates from its stated investment style or discipline, risking unintended factor exposures.

Tracking error measures how closely a portfolio follows the index it is benchmarked against. It estimates the volatility of excess returns.

A long position is one where the investor owns the asset outright. A short position is one where the investor borrows an asset and sells it, betting its price will fall.

Alpha is the return an investment delivers over a benchmark. Beta represents how volatile an investment is compared to the overall market.

Performance attribution aims to identify the specific sources of over or underperformance relative to a benchmark by analyzing sector, security, asset allocation, etc. decisions.