Efficient Frontier
The set of portfolios offering the highest expected return for each level of risk.
How it is identified
Test: no other portfolio offers a higher expected return at the same standard deviation, or the same return at a lower one
Unit
qualitative
In depth
The frontier is the output of mean-variance optimisation and is drawn from three inputs: expected returns, volatilities and the covariance matrix. Expected returns are the weakest of the three by far, and small changes in them produce wildly different optimal portfolios, which is why naive optimisers concentrate everything in a handful of assets. This estimation-error problem is the main reason practitioners constrain weights or use robust methods rather than trusting the raw optimisation. The frontier is a useful concept for thinking about trade-offs and a poor tool for actually choosing portfolios.
Worked example
Raising one asset's assumed return from 9% to 11% can move its optimal weight from 8% to 45% in an unconstrained optimisation. The two percentage points were a guess; the resulting portfolio is presented as precise.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Efficient Frontier” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.