Building a portfolio
Efficient frontier
The curve of portfolios that deliver the highest expected return available at each level of risk.
How it works
Plot every possible combination of assets by risk and expected return and the upper-left edge of the cloud is the frontier. Any portfolio beneath it is taking risk it is not being paid for.
The frontier is a teaching device more than a tool. Its value is the idea that risk and return trade off along a curve, and that there is such a thing as needlessly inefficient.
Related terms
- Modern portfolio theoryThe framework that treats risk as portfolio-level volatility and finds the best return for a given level of it.
- Sharpe ratioReturn above the risk-free rate, divided by volatility — how much return each unit of risk bought.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
More in Building a portfolio
- Fund overlap
- Effective number of holdings
- Glide path
- Drift
- Home bias
- Covariance
- Investment policy statement
- Correlation
All 20 Building a portfolio terms · The full glossary, 433 terms
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