We seek to construct the "Optimal Portfolio" based on your level of risk-tolerance and we are guided by the work of Nobel Laureate Harry Markowitz, who introduced modern portfolio theory to the investment world in 1952.
Markowitz found that by combining a set of different risky assets in varying ratios, at defined levels of risk-tolerance, a portfolio would exhibit a more certain range of returns with less fluctuations - i.e. the Optimal Portfolio.
The Optimal Portfolio for an investor's level of risk-tolerance is what advisers will often refer to as a Conservative, Balanced/Moderate, Growth or Aggressive portfolio. Or some variation.
We construct these portfolio using a graph seeking the Efficient Frontier
- which the video below, by Investopedia, explains very well.