Wize University Introduction to Finance Textbook > Risk, Return & Portfolio Theory
The Efficient Frontier
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The Efficient Frontier
A portfolio is efficient if there is no better combination of the same assets. Meaning that you cannot get a better return for the same amount of risk, or the same amount of return with less risk.
- Efficient Frontier is a term used in portfolio theory to describe the portfolios made up of specific assets that offer the highest return at any given level of risk.
- It is often depicted on a risk-return plot with risk on the x-axis and return on the y-axis. It is the top half of the parabola starting at the Minimum Variance Portfolio.
The efficient frontier tells us every possible portfolio that maximizes the expected return for every level of risk.
- Any point below the frontier is not efficient because for the same risk you can get a higher return, or you can get the same return for less risk.
- Any point above the frontier is not possible meaning that it is impossible to form a portfolio using the assets in question that would have that particular combination of risk and return.