What is the efficient frontier?



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When we speak of efficient frontier we refer to the concept of efficient portfolio frontier, it is the most efficient and profitable set of portfolios that we can see that are traded because the profitability expected is higher compared to other portfolios that are not. This is measured by looking at and comparing the different levels of risk that individuals take for investing in certain portfolios.

How do you represent the efficient frontier?

The efficient portfolio frontier is usually represented by a curve, which establishes as a minimum (a frontier) in which profitability risks are incurred or insolvency if any portfolio is below this line. In contrast, efficient portfolios are located above this curve, offering an optimal relationship between the benefits that the investor expects to obtain and the risks that they must face to do so.

As in the financial world, the greater the risk assumed, the greater the profitability obtained. This causes the efficient frontier to be increasing with respect to other portfolios that assume less risks. Said relationship between riesgo and profitability is the one represented by the curve of the efficient portfolio frontier, called the "Markowitz frontier". Since this curve represents a relationship, it is usually used to make decisions to be able to take or not investment projects when you want to invest in certain financial products.

When you have proof of investment in a project, you must know very well how and where to invest. Obviously, for each situation there will be a Markowitz frontier that is different from the rest of the set of portfolios, since the values ​​change from one market to another.

Finally, it should be noted that it is the investor who must decide where to position and invest, because by looking at the border, they can decide what type of risk they should take on and which one is more in line with their needs.

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