DEFINITION of 'Efficient Frontier'
A 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 suboptimal, because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are also suboptimal, because they have a higher level of risk for the defined rate of return.
INVESTOPEDIA EXPLAINS 'Efficient Frontier'
Since the efficient frontier is curved, rather than linear, a key finding of the concept was the benefit of diversification. Optimal portfolios that comprise the efficient frontier tend to have a higher degree of diversification than the suboptimal ones, which are typically less diversified.
The efficient frontier concept was introduced by Harry Markowitz in 1952 and is a cornerstone of modern portfolio theory.
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