MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns must accept more risk. The exact trade-off will not be the same for all investors. Different investors will evaluate the trade-off differently based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-expected return profile—i.e., if for that level of risk an alternative portfolio exists that has better expected returns.

Under the model:

Portfolio return is the proportion-weighted combination of the constituent assets' returns.
Portfolio return volatility 
\sigma _{p} is a function of the correlations ρij of the component assets, for all asset pairs (i, j). The volatility gives insight into the risk which is associated with the investment. The higher the volatility, the higher the risk.