The Essential Frontier™
Introducing the Efficient Frontier
The Efficient Frontier represents portfolios that have the
greatest potential return for a given level of risk. The classic
Efficient Frontier is shaped like a fishhook. It begins at the left
end of the curve with a 100% bond portfolio. Equities are added in
10% increments until you reach the right end of the curve, which
represents a 100% equities portfolio. This "fishhook" plot line
lays out the mix of bonds and equities at each risk point that
would most likely have offered the best possible return and lowest
risk.
The traditional Efficient Frontier asset mix may not offer
sufficient diversification or risk management. One possible
solution may be the addition of asset classes that have little or
no correlation to equities or fixed income-that is, their movement
is not tied to either equities or bonds.
Introducing the Essential Frontier
The Essential Frontier reallocates 20% of the traditional Efficient Frontier
portfolio to alternatives and divides it equally among five
alternative strategies: real estate, commodities, long/short
strategies, absolute return strategies and managed futures
strategies.
Efficient Frontier
2004-2010
| Equities/Bonds |
Return |
Standard Deviation |
| 100/0 |
3.85% |
15.55% |
| 90/10 |
4.09% |
14.04% |
| 80/20 |
4.31% |
12.54% |
| 70/30 |
4.50% |
11.06% |
| 60/40 |
4.66% |
9.61% |
| 50/50 |
4.80% |
8.18% |
| 40/60 |
4.91% |
6.82% |
| 30/70 |
4.99% |
5.56% |
| 20/80 |
5.06% |
4.49% |
| 10/90 |
5.09% |
3.76% |
| 0/100 |
5.10% |
3.61% |
Equities: S&P 500® Total Return, Bonds: Morningstar Long-Term
Government Bond Index |
Essential Frontier
2004-2010
Equities/Bonds/
Alternatives |
Return |
Standard Deviation |
| 80/0/20 |
4.56% |
14.24% |
| 72/8/20 |
4.74% |
13.04% |
| 64/16/20 |
4.90% |
11.85% |
| 56/24/20 |
5.05% |
10.66% |
| 48/32/20 |
5.17% |
9.50% |
| 40/40/20 |
5.29% |
8.36% |
| 32/48/20 |
5.38% |
7.25% |
| 24/56/20 |
5.46% |
6.19% |
| 16/64/20 |
5.52% |
5.22% |
| 8/72/20 |
5.57% |
4.38% |
| 0/80/20 |
5.60% |
3.77% |
20% allocation to alternatives: 4% NAREIT Index, 4% S&P GSCITM,
4% Tremont HFI, 4% Tremont Long/Short Equity Index, 4% S&P
DTI |
The Essential Frontier line shows how this new allocation
affects the Efficient Frontier by moving it leftward, resulting in
higher returns and lower standard deviation at most data points.
The result is a more diversified portfolio that may help even out
the ups and downs of the equity and fixed income markets. It's
important to note, of course, that these results are hypothetical
and not indicative of future performance. As a strategy for
diversification and risk management, however, the Essential
Frontier concept may be an idea you'll want to consider and discuss
with your advisor.
Performance displayed represents past
performance, which is no guarantee of future results.
Source: Calculated by Rydex SGI using data from
Bloomberg.com and Morningstar Direct. The portfolios are
hypothetical examples provided for illustration purposes only. No
assumptions should be made that similar asset allocations will be
profitable, suitable or perform as indicated above. Allocations and
their percentages should change based on an individual investor's
needs. The indices used to determine the return and risk figures
for the portfolios shown were: equities by S&P 500® Index;
bonds by Morningstar Long-Term U.S. Government Bond Index; and alts
by equal amounts of NAREIT (National Association of Real Estate
Investment Trusts®) Index, S&P GSCI™, Credit Suisse/Tremont
Hedge Fund Index, Credit Suisse/Tremont Long/Short Equity Index and
S&P DTI. Indices are not available for direct investment. The
index returns do not reflect any management fees, transaction costs
or expenses. Click here for
descriptions of the referenced indices.
Essential Frontier™ is a trademark of Rydex SGI and
is protected by copyright.
¹ Standard Deviation: A statistical measure of
historical volatility of an investment, usually computed using 36
monthly returns. More generally, a measure of the extent to which
numbers are spread around their average. The higher the number, the
more volatility is to be expected.
 
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