The other component of the portfolio is the risk free asset. What the constructor of the ideal portfolio will do, in essence, is determine the blend of the optimum risky portfolio and the risk free asset, based on the investor's own risk tolerance. The higher the risk tolerance, the more of the risk-free asset would be included in the portfolio. The risk tolerance -- and resulting percentage of risk-free asset -- would push the portfolio up and down the efficient frontier. This is based on the fact that the risky portion of the portfolio was already the optimum risky portfolio.

The modern portfolio theory that Markowitz developed has been refined over the years, but the basic tenets survive. A portfolio with sufficient...

The objective of doing this is to build a portfolio that is subject only to market risk. However, given that most assets are subject to variance of returns (risk), the optimum portfolio is one that delivered the greater expected return for a given level of variance. This portfolio, the optimum risky portfolio, exists at points along the efficient frontier. In order to move the portfolio along the efficient frontier, it is blended with a risk-free asset. This delivers the optimum complete portfolio. The return of the optimum complete portfolio will depend on the risk value of the portfolio. This in turn is set by the portfolio manager based on the risk preferences of the investor.