An optimal portfolio is one that occupies the ‘efficient’ parts of the risk-return premium spectrum. It satisfies the requirement that no other collection exists with a higher expected return at the same standard deviation of the return.

Different combinations of assets produce different levels of return. The optimal portfolio concept represents the best of these combinations, those that provide the maximum possible expected return for a given level of acceptable risk.

The relationship between assets is an essential part of the optimal portfolio theory. Some prices move in the same direction under similar circumstances, while others go in opposite directions. The more out of sync these price developments are, the lower the covariance between two assets is, which translates into lower overall risk.

The optimal portfolio does not focus on investments with either high expected returns or low risk. It aims to balance stocks carrying the best potential returns with acceptable risk. 

The optimal portfolio are focused primarily on the investors:

• We expect investors to be rational and all have access to the same information
• They are all risk-averse and share the goal to maximize returns
• No single investor can influence the market
• All market players have access to unlimited funds at a risk-free rate
• We assume that asset returns follow a normal distribution
• Investors base all decisions on the market on expected returns and standard deviation as a measure of risk.