Efficient Frontier

The efficient frontier is the set of portfolios that offer the highest expected return for each level of risk (or lowest risk for each level of return). Portfolios on the efficient frontier are considered 'optimal' - you cannot improve return without increasing risk, or reduce risk without sacrificing return.

By varying portfolio weights across all assets and calculating each combination's risk/return, we can plot all possibilities. The efficient frontier is the upper-left boundary of this plot.

• On the FrontierOptimal portfolio - no free improvement possible
• Below the FrontierInefficient - same return available with less risk

If you want 8% expected return, the efficient frontier tells you the minimum possible risk to achieve it. Any portfolio achieving 8% with higher risk is inefficient—you're taking unnecessary risk.

The efficient frontier provides a framework for rational portfolio choice. Your job is to pick the point on the frontier that matches your risk tolerance, then construct the corresponding portfolio.