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What is the “efficient frontier”?

What is the “efficient frontier”?

The “Efficient Frontier” is a modern portfolio theory tool, which demonstrates to investors the best possible returns they can expect from their portfolios, relative to the amount of risk they’re willing to accept.

For investors that find themselves below the “Efficient Frontier,” it means their strategy is not providing enough return for the level of risk assumed. The opposite is true as well.

What the theory means to communicate is that investors would be wise to include some higher growth, higher risk securities in their portfolios, but combine them in a strategic way so as to gain risk/reward value that comes with diversification.

What are Realistic Expectations for my Portfolio Performance?
Are the Markets Efficient?

Keywords: portfolio management, diversification, risk, modern portfolio theory, efficient frontier, diversifiable risk, risk return tradeoff, risk/return ratio,