The goal when I become a financial manager in theory is to maximize the shareholder wealth throughout the company.  First question to mind is- how a firm measures shareholder wealth so that we know if it’s increasing or not.  To understand what cause stocks to change in price, as well as how securities such as bonds and stocks are valued in financial markets, it is necessary to understand the concept of efficient markets.  “these are markets in which the values of all assets and securities at any instant in time fully reflect all available information (investorwords.com). Weather a market is efficient has to do with the speed with which information is impounded into security prices.  An efficient market is characterized by a large number of profit-driven individuals who act independently.  In addition, new information regarding securities arrives in the market in a random manner.  Given this setting, investors adjust to new information immediately and buy and sell the security until they feel the market price correctly reflects the new information.  Under the efficient market theory, information is reflected in security prices with such speed that there are no opportunities for investors to profit from publicly available information.  Investors competing for profits ensure that security prices appropriately reflect the expected earnings and risk involved and, thus, the true value of the firm. The efficient frontier was first defined by Harry Markowitz in support of portfolio theory.  The theory considers a universe of risky investments and explores what might be an optimal portfolio based on a set of specific investments.  Simply put, when considering portfolios which are subject to volatility, an optimal value in these investments are referred to as the efficient frontier. (ref: RiskGlossary.com) In today’s financial markets the modern theory stands that investors may alter their risk and return relationship by changing the mix between assets in a portfolio.  In relation to what interconnects the risk and return relationship, is a curve (graphical measure) called the efficient frontier.  This is the heart of modern portfolio analysis and is the foundation of asset allocation models.  Investors can achieve any combination of risk and return along this “curve” by changing the proportion of stocks and bonds.  If analyzing the risk/ return relationship between stocks and bonds, when moving up the curve means you would be increasing the proportion in stocks and correspondingly reducing the proportion in bonds.  Thus, when inspecting the slope of any point on the efficient frontier curve, this would indicate the risk-return trade off for that allocation. Bibliography Efficient Market Theory- Definition.http://www.investorwords.com/1672/Efficient_Market_Theory.html Foundations of Finance- The Logic and Practice of Financial Management. Pg.21Fouth Custom Edition. Written by: Arthur J. Keown, John D. Martin. Risk Glossary. The Theory behind the Efficient Frontier. Pg.1http://www.riskglossary.com/link/efficient_frontier.htm