Difference Between Efficient Frontier Positions and Optimal Portfolio

What are Efficient Frontier Positions?

Efficient Frontier positions represent portfolio allocations that offer the highest possible expected return for a specific level of risk. The positions on the Efficient Frontier are said to be efficient because they maximise the expected return for a level of risk selected.

Imagine a curve where each point represents a portfolio. The orange points on the curve, called Efficient Frontier positions, ensure you’re getting the most return for the risk you’re willing to take. See an example below:

Diversiview Efficient Frontier Positions on a graph.

There are multiple efficient positions, for different levels of risk, so you have the flexibility to select the allocation that works best for you. Drag the risk/volatility selector to the desired level. You will see the expected portfolio return for that level of risk, displayed directly under the risk/volatility selector. See example below:

Diversiview allows you to explore various positions on the Efficient Frontier. Each point on the frontier represents a portfolio with a specific risk level and expected return.

For an in-depth guide on how to calculate efficient frontier positions, click here.

What is the Optimal Portfolio Allocation?

The Optimal Portfolio allocation uses mathematical algorithms utilising Modern Portfolio Theory to find the allocation that maximises the portfolio return while minimising portfolio risk at the same time. Optimal Portfolio is a single point on the Efficient Frontier indicated by the red star. See example below:

Diversiview Graph depicting risk-return position for the Optimal Portfolio

Unlike the multiple options along the Efficient Frontier, this is the single optimal point, mathematically derived.

For an in-depth guide on how to calculate the optimal portfolio allocation, click here.

Potential Performance Difference between EF Positions and Optimal Portfolio

The following graph and table helps to visualise the potential impact of utilising Efficient Frontier positions in Diversiview:

Improve your investment portfolio's expected returns using the Efficient Frontier optimisation in Diversiview.

	Expected Return	Risk	Realised Gains
Original Portfolio	18.90%	34.80%	19.64%
Optimal Portfolio	27.05%	32.24%	21.79%
Efficient Frontier	32.25%	39.36%	23.00%

^{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.}

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