Maximum Sharpe Portfolio
The portfolio with the highest risk-adjusted return.
The maximum Sharpe ratio portfolio (also called the tangency portfolio) offers the best trade-off between excess return and risk. It lies where the Capital Market Line is tangent to the efficient frontier. Investors seeking optimal risk-adjusted returns often target this portfolio.
Related Terms
Efficient Frontier
The set of portfolios offering the highest return for each level of risk.
Sharpe Ratio
Risk-adjusted return: excess return divided by volatility.
Capital Market Line (CML)
The line from the risk-free rate through the optimal portfolio.
Covariance Matrix
Captures how asset returns move together — the foundation of diversification.
Portfolio Volatility
Standard deviation of portfolio returns — total risk including diversification effects.
Minimum Variance Portfolio
The portfolio with the lowest possible volatility.