Efficient Frontier
The set of portfolios with the best return for each level of risk.
What is Efficient Frontier?
The upper boundary of the risk-return opportunity set. Portfolios below the frontier are inefficient - the same risk could earn more. Its practical weakness is total dependence on estimated inputs.
Efficient Frontier: a worked example
A portfolio returning 7% at 12% volatility is inefficient if another returns 9% at the same 12%.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Efficient Market Hypothesis
Prices already reflect available information.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
Total Return
Price change plus income, as a single return figure.