Efficient frontier
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The set of portfolios offering the maximum expected return for each level of risk.
Efficient frontier in plain English
The efficient frontier is a way to picture the best possible trade-offs between risk and reward when you build a portfolio (a mix of investments). For any level of risk you're willing to stomach, there's a best mix that gives the highest expected return — and the efficient frontier is the curve connecting all those 'best you can do' mixes. Any portfolio sitting below the curve is a bad deal, because you could earn more without taking on any extra risk. Think of it as the top edge of a menu: you'd never order a dish that costs the same as another but tastes worse, and you'd never hold a portfolio that's just as risky as another but pays less.
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