Question

How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques? What limitations might an analyst encounter through the use of EFA? How can efficient frontier analysis results be communicated and utilized with non-mathematical decision makers? Required: Provide an original initial posting of at least 300 words

Answer 1

How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques?

EFA gives the highest level of return which is expected for any level of risk and any combination of assets. It determines the risk and returns for investment by accessing the risk vs. return approach. This is the main difference as the financial values of the asset is key to the analysis.

What limitations might an analyst encounter through the use of EFA?

While using EFA, the analyst can misunderstand the nature of an EF model and the assumptions on which it relies. It is like giving a powerful tool in the wrong hands of a wrong person. EF models rely highly on the historical data and relationships to generate the optimal portfolio. The analyst should put some constraint on the asset portfolio to make it an EF model such as international assets not exceed 30 percent or 40 percent of the portfolio. thus, an investor can not know it all in advance.

How can efficient frontier analysis results be communicated and utilized with non-mathematical decision-makers?

Before communicating the results it is necessary to consider the purpose of the decision-makers and then logically formulate the communication. It must be ensured that all participants can understand by incorporating practically-obtainable information. One can use a focus grid that can be used to determine the focus areas that should be included, and which must be ignored while delivering the results. important parts of the plan can include written reports, electronic communications, and well-documented analytical models and slide presentations.

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