Question

Evaluate the concept of the effective frontier and how you will use to determine an asset portfolio for a specified investor

Answer 1

Efficient frontier is a plot between expected return of portfolios vs the standard deviation or risk of portfolio. It shows that for higher risk or standard deviation expected return should be high. If returns are low from portfolio then risk or standard deviation should be low. It helps to identify portfolios which have higher returns for given risk and lower returns for given risk.It helps to identify maximum returns for a given risk or standard deviation.

If the returns are above efficient frontier, which means the returns are higher than expected for given risk portfolio should be accepted and if returns are lower for given risk project portfolio should be rejected or sold.