Efficient Frontier
Efficient Frontier Defined
Investors should generally seek the greatest return for a given
level of risk. This concept, known as the Efficient Frontier, was
first defined in 1952 by Harry Markowitz in the Nobel prize-winning
research that launched Modern Portfolio Theory.
The efficient frontier represents those portfolios that are
considered the most efficient-that is, have the greatest return for
a given level of risk.
The Efficient Frontier plots all optimal portfolios in a given
time period based on three measures:
- Mean return
- Standard deviation (a measurement of risk)
- Correlation of assets (a statistical measure of how two
securities move in relation to each other)
¹ Standard Deviation: A statistical measure of the
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.
² No investment strategy can guarantee returns in a
declining market.
Source: Calculated by Rydex SGI using data from
Morningstar Direct. All rights reserved. Used with permission.
Performance displayed represents past performance, which is
no guarantee of future results. This example is for
illustrative purposes only. The chart above depicts the efficient
frontier of equity and bond portfolios illustrated in 10%
increments. Equity returns are based on the returns of the S&P
500® Index, which includes the reinvestment of dividends. Bond
returns include the reinvestment of dividends and are based on the
Morningstar Long-Term U.S. Government Bond Index. The S&P 500®
and the Morningstar Long-Term U.S. Government Bond are unmanaged
and not available for direct investment. The index returns do not
reflect any management fees, transaction costs or expenses. Click here for a description
of the referenced indices.
Download a copy of the
Efficient Frontier for more information.
 
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