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## How to Build Efficient Frontier in Excel

As we know, an efficient frontier represents the set of efficient portfolios that will give the highest return at each level of risk or the lowest risk for each level of return. A portfolio is efficient if there is no alternative with: Higher expected return with same level of risk Same expected return with lower

## Selecting Optimal Portfolio for an Investor

In the previous articles, we learned that an investor can invest in a combination of risk-free asset and risky assets anywhere on the capital allocation line. A rational investor is also risk-averse and has a utility indifference curve that characterizes his risk-return expectations. However, the problem is that on the capital allocation line, the investor can create

## Effect of Correlation on Diversification

In this article, we will look at how correlation affects the diversification benefits of a portfolio. Let’s take a portfolio with two assets. The correlation between the two assets can range from -1.0 to 1.0 and depending on the correlation figure the shape of the efficient frontier will change. The following graph shows how the

## Efficient Frontier for a Portfolio of Two Assets

We learned that the calculation of risk for a portfolio of two assets is not straight forward as we also have to account for the covariance between the assets in the portfolio. Depending on the correlation between the assets, the risk-return profile of the portfolio changes. Note that we can combine the two assets in

## Portfolio Risk & Return – Part 1B – Video

This video by Arif Irfanullah provides a very clear conceptual understanding of the portfolio risk and return concepts as a part of the CFA Level 1 syllabus. This video talks about Markowitz Efficient Frontier Capital Allocation Line Risk Aversion Risk-Return Indifference Curve Optimal Investor Portfolio

## The Minimum Variance Frontier & Efficient Frontier

Two asset classes (stocks and bonds for example) can be combined with varying proportions to create an infinite number of portfolios. An investor can calculate the expected returns and variances of a two asset portfolio and plotting these on the Y (returns) and X (variances) axis of a graph. Global Minimum Variance Portfolio: The portfolio

## The Capital Asset Pricing Model

The Capital Asset Pricing Model is a popular asset pricing model in Finance. It is used to determine the expected rate of return of a risky asset. It says that the expected return on a risky asset is equal to the risk-free rate plus a risk premium. The risk premium is a measure of non-diversifiable

## Constructing an Efficient Frontier

The concept of Efficient Frontier was first introduced by Harry Markowitz in his paper on Portfolio Selection (1952 Journal of Finance). The portfolio theory considers a universe of risky investments and explores these possible investments in order to find the optimum portfolio. So, for a given amount of risk, MTP explains how select a portfolio