Efficient frontier - Wikipedia Efficient frontier This article is about a financial mathematical concept. For other frontiers described as efficient, see Production possibilities frontier and Pareto frontier. Efficient Frontier. The hyperbola is sometimes referred to as the ' Markowitz Bullet ', and its upward sloped portion is the efficient frontier if no risk - free asset is available. With a risk - free asset, the straight line is the efficient frontier. In modern portfolio theory, the efficient frontier ( or portfolio frontier ) is an investment portfolio which occupies the ' efficient ' parts of the risk - return spectrum. Formally, it is the set of portfolios which satisfy the condition that no other portfolio exists with a higher expected return but with the same standard deviation of return. The efficient frontier was first formulated by Harry Markowitz in 1952. Overview A combination of assets, i.e. a portfolio, is referred to as `` efficient '' if it has the best possible expected level of return for its level of risk ( which is represented by the standard deviation of the portfolio 's return ). Here, every possible combination of risky assets can be plotted in risk -- expected return space, and the collection of all such possible portfolios defines a region in this space. In the absence of the opportunity to hold a risk - free asset, this region is the opportunity set ( the feasible set ). The positively sloped ( upward - sloped ) top boundary of this region is a portion of a hyperbola and is called the `` efficient frontier. '' If a risk - free asset is also available, the opportunity set is larger, and its upper boundary, the efficient frontier, is a straight line segment emanating from the vertical axis at the value of the risk - free asset 's return and tangent to the risky - assets - only opportunity set. All portfolios between the risk - free asset and the tangency portfolio are portfolios composed of risk - free assets and the tangency portfolio, while all portfolios on the linear frontier above and to the right of the tangency portfolio are generated by borrowing at the risk - free rate and investing the proceeds into the tangency portfolio. See also Modern portfolio theory References Jump up ^ `` Efficient Frontier ''. Investopedia. investopedia.com. Retrieved 15 May 2017. Jump up ^ `` Markowitz efficient frontier ''. NASDAQ. nasdaq.com. Retrieved 15 May 2017. Jump up ^ Markowitz, H.M. ( March 1952 ). `` Portfolio Selection ''. The Journal of Finance. 7 ( 1 ) : 77 -- 91. doi : 10.2307 / 2975974. JSTOR 2975974. Jump up ^ Edwin J. Elton and Martin J. Gruber ( 2011 ). Investments and Portfolio Performance. World Scientific. pp. 382 -- 383. ISBN 978 - 981 - 4335 - 39 - 3. Jump up ^ Merton, Robert. `` An analytic derivation of the efficient portfolio frontier, '' Journal of Financial and Quantitative Analysis 7, September 1972, 1851 - 1872. 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Question: what is the efficient frontier in portfolio theory
Answer: an investment portfolio which occupies the 'efficient' parts of the risk-return spectrum