Efficient Frontier
The set of portfolios offering the highest return for each level of risk.
The efficient frontier is a curve in risk-return space representing portfolios that are 'mean-variance optimal'. Each point on the frontier offers the maximum expected return for its level of volatility (risk). Portfolios below the frontier are suboptimal because you could achieve higher return for the same risk or lower risk for the same return.
Formula
Related Terms
Sharpe Ratio
Risk-adjusted return: excess return divided by volatility.
Minimum Variance Portfolio
The portfolio with the lowest possible volatility.
Maximum Sharpe Portfolio
The portfolio with the highest risk-adjusted return.
Covariance Matrix
Captures how asset returns move together — the foundation of diversification.