Definition of Efficient frontier:
The efficient frontier rates portfolios (investments) on a scale of return (y-axis) versus risk (x-axis). Compound Annual Growth Rate (CAGR) of an investment is commonly used as the return component while standard deviation (annualized) depicts the risk metric. The efficient frontier theory was introduced by Nobel Laureate Harry Markowitz in 1952 and is a cornerstone of modern portfolio theory (MPT).
The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return.
Situation of maximum return from minimum risk, thus the best risk-reward ratio for a given asset under the present circumstances.
How to use Efficient frontier in a sentence?
- Successful optimization of the return versus risk paradigm should place a portfolio along the efficient frontier line.
- Optimal portfolios that comprise the efficient frontier tend to have a higher degree of diversification.
- Efficient frontier comprises investment portfolios that offer the highest expected return for a specific level of risk.
- Returns are dependent on the investment combinations that make up the portfolio.
- The standard deviation of a security is synonymous with risk. Lower covariance between portfolio securities results in lower portfolio standard deviation.
Meaning of Efficient frontier & Efficient frontier Definition