Frontier skiing is different from the efficient frontier: The latter is preferred for your investment portfolio
Endowus Insights

Frontier skiing is different from the efficient frontier: The latter is preferred for your investment portfolio

Updated
April 14, 2022
published
December 8, 2017
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"The whole is greater than the sum of its parts."
  • Aristotle

You are skiing down that perfect slope. You are teetering on the border of exhilaration and fear. You are alert and aware of the risks. You are focused on your technique and execution, knowing that the experience will return a feeling of euphoria. Finding that perfect slope is very much the same as finding that efficient investment portfolio which optimises risk and return.

For many investors, creating a portfolio means picking a list of their favourite companies. What they don't understand is that sometimes, in a properly diversified portfolio, the sum can be greater than its parts -- basically, a free lunch (read our articles on Diversification and Asset Allocation). Rather than just investing in Lululemon and Amazon, you want to be greedy and invest in the most efficient portfolio possible, where you can have the highest expected return for the lowest risk (volatility).

According to Nobel Laureate Harry Markowitz (founder of the "don't put all your eggs in one basket" school of portfolio allocation), there are combinations of securities with different risk and return characteristics to produce optimal portfolios. These portfolios are designed to deliver the greatest expected return given a certain level of risk. If you plot these portfolios on a graph, you will get the efficient frontier.

Markowitz's work on the efficient frontier has a far-reaching impact to this day and continues to influence how the best investment professionals manage money at the biggest funds. It is also key to our investment philosophy here at Endowus: we are creating portfolios that sit along the efficient frontier and will always be on the lookout for assets that will further push our portfolios left -- and/or up -- on the chart, so that you can get the most return for the least risk.

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