> For the complete documentation index, see [llms.txt](https://docs.frnx.ai/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.frnx.ai/explainer-modern-portfolio-theory-mpt/key-concepts.md).

# Key Concepts

* **Expected Return:**\
  The anticipated return of a portfolio is based on the weighted average of individual asset returns.
* **Risk (Variance/Standard Deviation):**\
  Measures the portfolio’s return volatility. A higher variance indicates greater uncertainty and potential for large fluctuations.
* **Correlation:**\
  The degree to which two assets move in relation to each other. Negative or low correlations between assets reduce overall portfolio risk.
* **Efficient Frontier:**\
  A curve representing the set of optimal portfolios offering the highest expected return for a given level of risk. Portfolios below the frontier are suboptimal, while those on the curve maximize return for their risk level.
* **Sharpe Ratio:**\
  A measure of risk-adjusted return, calculated as the portfolio's return above the risk-free rate divided by its standard deviation. Higher Sharpe ratios indicate better risk-return trade-offs.