Portfolio management theory seeks to make the most of risk-adjusted returns and take full advantage of portfolios through evaluation, diversification, and other asset management strategies. Financial management is one of the most common areas of application of portfolio management theory. Portfolio management theory helps investment managers to create a portfolio of investments to meet the current financial goals of the company. One of the fundamental principles of portfolio management theory is to yield value to the business and manipulate existing value to enhance returns. It is a theory on how investors can construct portfolios with a view to optimize market risk and derive more returns from a business.

Portfolio management is the process of defining portfolios, evaluating, tracking and studying portfolio performance, and reporting results to stakeholders. Portfolio management involves the balancing of risks and rewards for getting greater returns. Companies employ portfolio management for efficiently managing their resources. Portfolio management theory states that every project should be analyzed for risks involved and the returns expected. Successfully applying the portfolio management theory in practice helps an IT company to accept projects having lesser size and complexity, while the success rate and returns are more.

The core principle of portfolio management theory is diversification. Many IT companies risk a major part of their budget on huge projects, without making a proper risk analysis. These projects eat up whole lot of funds. They also result in late schedules and missed delivery dates. In case projects are cancelled midway, a good part of the investment is lost and the company loses its credibility. A company that accepts many smaller and closely evaluated projects stands to gain more. Portfolio management theory holds that investors concerned with wealth management have to turn to alternative investments.