How does traditional portfolio theory adapt to the new facts? The old .two-fund. theorem becomes a .many-fund. theorem; some investors can improve returns by investing in portfolio strategies that let them take on nonmarket sources of risk; and other investors can shed nonmarket risks in the same way. Investors can, if willing to take on the risks, improve returns by some modest market timing. However, the average investor must always hold the market, so only investors who are different from average can benefit from holding new and unusual portfolios.