The Reading-born 21-year-old has put pen to paper on a three-year deal at Molineux for an undisclosed fee following a medical.
Former England U19 representative Wallace made his Portsmouth debut at Swindon on New Year’s Day 2013 and has since gone on to make 121 appearances for the side.
Wallace’s time at Fratton Park saw him become Portsmouth’s top scorer in each of the last two seasons, scoring seven and 17 goals respectively.
He also won six player of the year accolades during his time and was named in the PFA League Two Team of the year.
Reflecting on the signing Wolves head coach Kenny Jackett told the club’s website: “He is a young footballer with a very bright future who has played a lot of football for a 21-year-old and is now ready to make the step up to the Championship.
“I am looking forward to working with him in the new season.”
Wallace said: “It’s a big step for me from League Two but I am looking forward to getting going.
“Portsmouth are an important club to me and they gave me my chance in football. I don’t think you can ever forget things like that.
“For me now I am desperate to prove myself at a higher level. The gaffer here has given me a chance which I really appreciate.
“I’m looking forward now to playing for the Wolves fans and giving my all for them now. Wolves is a very ambitious club.
“There is a good mix here of experienced pros and young players and they had a good season – 78 points and not getting in the play-offs is unheard of!
“It is a club going in the right direction and hopefully I can break into the team and be a part of that over the next few years.
“I’m really looking forward to getting back at the end of June and getting to know the rest of the lads.”