In 1952, Harry Markowitz published his doctoral thesis that laid the foundation of what is now known as the Modern Portfolio Theory. His paper has changed the investment industry ever since. And Markowitz received a Nobel Price in 1990 for his researches.

The MPT defines risk as the standard deviation of expected returns. Basically, it means the stability of the returns. If a stock has suddenly increased 200% in the past two weeks, it is a RISKY stock because its return is not stable despite the fact that it went up. Basically, you can translate low risk as consistency.

MPT further assumes that for every rational investor, the goal is to achieve the highest return with the highest consistency (lowest risk). And thus, it is totally possible to construct an optimal portfolio that has the highest return/risk ratio. We all know that diversification reduces risk. The MPT provides the way to find the portfolio that provides the best risk-reducing benefit while sacrificing as little return as possible. This induces the concept of Efficient Frontier.