 In this section, we are going to talk about what is meant by the theory of portfolio choice. So, when we talk about the financial investments, it is always better not to put all the eggs in one basket. So, there is this very famous saying which we have been studying since we have started studying finance. So, the smart financial experts always advise you to come up with a portfolio of investments. And when we make portfolios, what is a portfolio? A portfolio is a kind of an account in which you pool different financial instruments and plan for yourself. It can be that you have invested in different sectors. It can be that you have taken financial instruments from different maturity time periods. There are short term or long term. By doing this, you have made a portfolio. So, we are going to discuss what is meant by the theory of portfolio choice. That is, when we make portfolios, the different portfolios you have to include depend on the factors of choice. So, the theory of portfolio choice says that there are four important factors that help us in sorting out and finalizing which financial assets you should invest in in order to come up with a portfolio. To decide which financial instruments I have to include, there are four key factors. First of all, the quantity demanded of any financial asset is positively linked to wealth. So, if you increase the wealth, you will demand different financial assets. Next, the quantity demanded of an asset portfolio theory says that it is dependent upon the expected return. So, the financial assets that offer you a better expected return, you like to take more of them. Thirdly, the quantity demanded of a financial asset depends on the risk or uncertainty attached to any financial asset. To tell you the risk that influences the quantity demanded of a financial asset negatively. So, the risk or uncertainty of a financial asset will be of a high level. People like to take less of them. Fourthly, the last factor that influences the quantity demanded of a financial asset is liquidity. As compared to the alternative financial assets that you have other than financial assets, the readily convertible into cash is the quantity demanded of a financial asset. When we talk about the theory of portfolio choice, it tells us that the quantity demanded of a financial asset depends upon four factors which are wealth, the expected return, the risk associated and the liquidity of that particular financial asset relative to the liquidity of the other alternative financial assets.