Efficient Frontier
What is the Macroaxis Efficient Frontier?
The risk of a portfolio comprises systematic risk, also known as undiversifiable risk, and unsystematic risk which is also known as idiosyncratic risk or diversifiable risk. Systematic risk refers to the risk common to all securities. Unsystematic risk is the risk associated with individual assets. Unsystematic risk can be diversified away to smaller levels by including a greater number of assets in the portfolio (specific risks "average out"). The same is not possible for systematic risk within one market. Depending on the market, a portfolio of approximately 30-40 securities in developed markets such as the UK or US will render the portfolio sufficiently diversified to limit exposure to systemic risk only. In developing markets a larger number is required, due to the higher asset volatilities. A rational investor should not take on any diversifiable risk, as only non-diversifiable risks are rewarded within the scope of this model. Therefore, the required return on an asset, that is, the return that compensates for risk taken, must be linked to its riskiness in a portfolio context - i.e. its contribution to overall portfolio riskiness - as opposed to its "stand alone riskiness." In the CAPM context, portfolio risk is represented by higher variance i.e. less predictability. In other words the beta of the portfolio is the defining factor in rewarding the systematic exposure taken by an investor.
How do I benefit from the Efficient Frontier?
Our Wealth Optimization Platform is a set of comprehensive modules that, although written in the context of Modern Portfolio Theory, can be utilized by both experts and novice investors. We are proud to be one of the first companies to give investors the ability to create optimal portfolios at virtually no cost. Regardless of your background, budget, or investment philosophy, you will find our platform and community useful in building optimal portfolios for yourself or your clients. Simply create your portfolio and run one of our optimization modules; than see your portfolio on investor landscape, hopefully on the efficient frontier. This is educated diversification - no gimmicks, just math.
All this basically implies that, for a given amount of risk, the portfolio lying on the efficient frontier represents the combination offering the best possible return. Mathematically the Efficient Frontier is the intersection of the set of portfolios with Minimum Variance (MVS) and the set of portfolios with Maximum Return.
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