The y-axis is made up of the expected returns of the portfolio. It is represented by plotting the expected returns of a portfolio and the standard deviation of returns. Therefore, diversification can create an efficient portfolio that is located on a curved line. In other words, there is a diminishing marginal return to risk, and it results in a curvature.ĭiversifying the assets in your portfolio leads to increased returns and decreased risks, which leads to a portfolio that is located on the efficient frontier. It is because every increase in risk results in a relatively smaller amount of returns. Where portfolios are located on the efficient frontier depends on the investor’s degree of risk tolerance. A portfolio is said to be efficient if there is no other portfolio that offers higher returns for a lower or equal amount of risk. Updated OctoWhat is an Efficient Frontier?Īn efficient frontier is a set of investment portfolios that are expected to provide the highest returns at a given level of risk.
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