Efficient Frontier

If a Stock Portfolio lies on the Efficient Frontier, this offers the maximum return for the level of risk taken.

In investing, the concept of an Efficient Frontier, is the optimal risk return allocation for the specific asset allocation. In a Stock Portfolio, this means returns are maximized for the level of risk taken. A Stock Portfolio that lies on the Efficient Frontier is known as the Optimal Portfolio and it usually exhibits a higher degree of diversification. An Optimal Portfolio can be defined as either offering the lowest risk for a defined expected return or offering the highest expected return per a defined unit of risk. Sub-optimal Portfolios are portfolios that do not lie on the Efficient Frontier, offering less returns per unit of risk taken. The Efficient Frontier concept can also be applied to a mixture of Asset Classes, Equities, Bonds and Funds.