Question

Explain the sense in which your frontiers can be described as ‘efficient’

Answer 1

In the year 1952, a paper entitled “Portfolio Selection” was published in the Journal of France. Harry Markowitz, the writer of this paper, had put forward his Modern Portfolio Theory (MPT) in that paper. This is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it's possible to construct an efficient frontier of optimal portfolios offering the maximum possible expected return for a given level of risk. This efficient frontier, popularly known as the Markowitz Efficient Frontier, is the set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are also sub-optimal because they have a higher level of risk for the defined rate of return.