Portfolio optimisation is the process of selecting the best possible mix of investments to achieve your financial goals while managing risk. It uses data and mathematical models to help investors maximise returns for a given level of risk, or minimise risk for a desired level of return.
Whether you are a beginner or a seasoned investor, portfolio optimisation is the foundation of smart, evidence-based investing.
Why Portfolio Optimisation Matters: Improving Risk-Adjusted Returns
Portfolio optimisation is crucial for achieving better risk-adjusted returns, helping investors earn more without taking on unnecessary risk. In today’s volatile and interconnected global markets, simply holding a diverse set of assets is no longer enough. Market shocks, rapid economic changes, and geopolitical events can quickly alter the risk and return profile of traditional portfolios. As a result, investors need to continually assess and adjust their asset allocation to ensure their investments remain aligned with their goals and risk tolerance.
Portfolio Optimisation tools like Diversiview are designed to address these challenges by leveraging advanced analytics and AI. These technologies provide data-driven insights, enabling investors to identify the most efficient asset allocations for their portfolio mix. By analysing factors such as diversification, correlation, and volatility, these platforms help users construct portfolios that are better positioned to deliver consistent returns while mitigating downside risk, even in turbulent markets.
“Diversiview by LENSELL offers a comprehensive solution that includes detailed portfolio analyses, visual identification of efficient asset allocations, and data driven insights on asset allocation adjustments that could improve the chances of good returns in bull markets and reduce the risk of loss in downturns—all with a fast turnaround.”
The impact is measurable: Professional clients using optimised allocations have seen an average compound annual growth rate (CAGR) increase of over 5% in the past year, demonstrating the real-world benefits of portfolio optimisation.
Modern platforms like Diversiview democratise access to these advanced strategies, making them available to both professionals and individual investors. Users can now analyse and optimise portfolios across multiple global markets, including the ASX, NYSE, NASDAQ, LSE, NSE, BSE, HKEX, DFM and over 7,000 Indian mutual funds—unlocking broader diversification and the potential for improved risk-adjusted returns. This empowers investors to:
- Navigate uncertainty: Quickly adjust to market changes and economic shocks.
- Capitalise on new opportunities: Identify and allocate to emerging markets, sectors, or asset classes.
- Maintain control: Retain decision-making power while benefiting from data-driven, actionable recommendations.
Core Concepts: MPT, Efficient Frontier, Sharpe Ratio
Modern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT), developed by Harry Markowitz in the 1950s, is the foundational framework for portfolio optimisation. MPT formalised the principle that diversification—spreading investments across different asset classes—can significantly reduce risk and enhance potential returns. Rather than evaluating each investment in isolation, MPT considers how each asset interacts with others in a portfolio, focusing on the overall risk-return profile.
The theory assumes investors are risk-averse, preferring portfolios that offer the highest expected return for a given level of risk. MPT uses statistical measures like variance and correlation to assess how assets move in relation to each other. By combining assets that are not perfectly correlated, investors can construct portfolios that achieve greater returns without necessarily increasing risk. This approach allows for the creation of optimised portfolios tailored to an investor’s risk tolerance and return objectives.
Efficient Frontier
The Efficient Frontier is a core concept within MPT and serves as a visual tool for understanding portfolio optimisation. It is a graphical representation of all optimal portfolio combinations that offer the highest expected return for each given level of risk (volatility). On the graph below that represents the Portfolio Universe (an universe of potential risk-return positions for a set of holdings), the Efficient Frontier is shown as a set of orange points that appear as an orange curved line; portfolios that sit on this line are considered efficient, delivering the maximum possible return for their risk level. Portfolios below the frontier are inefficient, as they provide lower returns for the same risk.
“The efficient frontier is a graphical representation of all optimal portfolio combinations that offer the highest expected return for a given level of portfolio risk (volatility). Imagine a curved line on a graph; portfolios below the line are inefficient, offering lower returns for the same level of risk.”
— Diversiview1
The Efficient Frontier helps investors identify the best possible asset allocation that matches a risk-reward goal. By adjusting portfolio weights and considering correlations between assets, investors can move their portfolios closer to the Efficient Frontier, maximising returns without taking on unnecessary risk.
The graph below describes a case study where a portfolio value is shown in both original (non-optimised) and an Efficient Frontier (optimised) allocation.
Sharpe Ratio
The Sharpe ratio is a widely used metric for evaluating risk-adjusted returns. It measures how much excess return an investment portfolio generates for each unit of risk taken, where risk is typically defined as portfolio volatility.
A higher Sharpe ratio indicates that a portfolio is delivering better returns for the risk assumed, making it a valuable tool for comparing different portfolios or investment strategies. Investors use the Sharpe ratio to determine whether they are being adequately compensated for the risk they are taking, and to select the most efficient portfolio for their risk tolerance.
“The Sharpe ratio helps investors understand how much excess return they are receiving for the extra volatility that they endure for holding a riskier asset.”
— Investopedia2
4. Common Mistakes in Portfolio Optimisation and How to Avoid Them
Ignoring Correlations
Many investors overlook how assets move in relation to each other, which can lead to concentrated risk. Here’s how you can avoid them:
- Use correlation analysis tools: Regularly assess how your portfolio assets interact. Many digital platforms, including Diversiview, now provide easy-to-understand correlation matrices or visualisations.
- Diversify across truly different asset classes: Choose assets with low or negative correlations because they will help you reduce the total portfolio risk.
- Review correlations periodically: Correlations can change over time, especially during periods of market stress. Make correlation checks a routine part of your investment review process.
Adding Too Many Assets
Adding too many similar assets hoping to achieve higher diversification can dilute returns without meaningfully reducing risk. Here’s how you can avoid adding too many assets:
- Focus on quality, not quantity: Prioritise assets that bring unique risk/return characteristics to your portfolio, rather than simply increasing the number of holdings.
- Monitor for redundancy: Use portfolio analysis tools, like Diversiview, to identify overlap (e.g., multiple funds tracking the same index or sector).
Set-And-Forget Mentality
Failing to regularly review and rebalance/re-optimise can leave portfolios misaligned with goals or risk tolerance. Here’s how you can avoid the set-and-forget mentality:
- Schedule regular reviews: Set calendar reminders for yourself to review your portfolio at some intervals, for example quarterly, half yearly or annually.
- Rebalance to target allocations: Adjust your holdings to maintain your desired set target allocation, selling assets that have grown overweight and buying those that are underweight.
- Re-optimise to goal-aligned allocations: Adjust your holdings to maintain a desired risk-return goal, rather than to a set target allocation that may be no longer efficient.
- Stay informed and adapt: Keep up to date with market trends and your own financial goals, making adjustments as needed to stay on track
5. Optimised vs. Current Portfolio Performance
When constructing an investment portfolio, the way assets are allocated can make a significant difference in long-term performance. Using Diversiview and applying Modern Portfolio Theory (MPT) to calculate the Efficient Frontier, we can clearly see how optimising asset allocation leads to superior outcomes compared to a non-optimised, equally weighted approach.
Key Performance Metrics: Current vs. Optimised Allocation
Below is a comparison of the sample portfolio’s performance before and after optimisation:
| Metric | Current Allocation | Optimised Allocation | Improvement |
| Portfolio Expected Return | 18.48% | 31.14% | ↑ +12.66% |
| Portfolio Risk (Volatility) | 40.49% | 37.28% | ↓ Reduced |
| Portfolio Sharpe Ratio | 0.46 | 0.83 | ↑ Higher |
| Portfolio Beta | 1.39 | 1.22 | ↓ Lower |
| Portfolio Alpha | 0.17% | 0.30% | ↑ Higher |
What Does This Mean for Investors?
- Higher Expected Returns: The optimised example portfolio offers a substantial increase in expected annual return—12.66% more than the original allocation.
- Lower Volatility: portfolio optimisation reduces portfolio risk, meaning investors can potentially achieve higher returns with less fluctuation.
- Improved Risk-Adjusted Performance: The Sharpe Ratio, a measure of risk-adjusted return, improves significantly, indicating a more efficient use of risk.
- Long-Term Impact: For a $200,000 portfolio, this portfolio optimisation could translate to an extra $458,760 in returns over a 10-year period, simply by adjusting the asset allocation.
Why Optimisation Matters
The analysis highlights that even a portfolio of high-quality stocks can be inefficient if not properly allocated. By leveraging Diversiview’s data-driven insights and the principles of MPT, investors can identify and implement an optimal asset mix that maximises returns for a given level of risk.
This approach ensures that portfolios are not just diversified, but also strategically positioned along the efficient frontier—delivering better outcomes without necessarily increasing risk.
6. Conclusion
In summary, portfolio optimisation is not just about maximising returns, it is about building resilient portfolios that can weather market volatility and deliver on long-term financial goals. With tools like Diversiview, investors gain the clarity, control, and confidence needed to make smarter investment decisions in 2025 and beyond.
Start optimising your portfolio with Diversiview today! Get a free analysis and see how data-driven insights can help you achieve better results.
References
1. https://diversiview.online/
2. https://www.investopedia.com/articles/07/sharpe_ratio.asp
3. https://www.investopedia.com/investing/importance-diversification/
Note: Diversiview does not provide financial advice or recommendations. Analyses are intended to provide investors with insights and information. This is a real portfolio and the decision to reallocate assets was made solely by the user.