A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk (which is represented by the standard deviation of the portfolio's return).^{} Here, every possible combination of risky assets can be plotted in riskâ€“expected return space, and the collection of all such possible portfolios defines a region in this space. In the absence of the opportunity to hold a risk-free asset, this region is the opportunity set (the feasible set). The positively sloped (upward-sloped) top boundary of this region is a portion of a hyperbola^{} and is called the "efficient frontier."

If a risk-free asset is also available, the opportunity set is larger, and its upper boundary, the efficient frontier, is a straight line segment emanating from the vertical axis at the value of the risk-free asset's return and tangent to the risky-assets-only opportunity set. All portfolios between the risk-free asset and the tangency portfolio are portfolios composed of risk-free assets and the tangency portfolio, while all portfolios on the linear frontier above and to the right of the tangency portfolio are generated by borrowing at the risk-free rate and investing the proceeds into the tangency portfolio.

This page was last edited on 16 December 2017, at 18:11.

Reference: https://en.wikipedia.org/wiki/Efficient_frontier under CC BY-SA license.

Reference: https://en.wikipedia.org/wiki/Efficient_frontier under CC BY-SA license.

- Modern Portfolio Theory
- Portfolio
- Risk-return Spectrum
- Return
- Standard Deviation
- Harry Markowitz
- Expected
- Risk
- Risk-free Asset
- Feasible Set
- Hyperbola

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