Conservative investors cannot tolerate more than a low level of risk, and are willing to accept a return commensurate with that level of risk. More aggressive investors are willing to tolerate higher levels of risk in the expectation of higher returns. The efficient frontier is a line on the graph that represents a series of optimal risk-return relationships. That is, every dot on the line represents the highest return for a given level of risk or, stated conversely, the lowest risk for a given rate of return. Your portfolio should be at that spot on the efficient frontier that approximates your particular risk-return goal.
Risk is shown in levels of standard deviation, a commonly used measure of volatility.
It is unlikely, over time, that returns will be higher than those shown on the efficient frontier. Of course, you may, in specific instances, achieve a higher return than that shown, but your average return over time will generally not exceed the amount shown. Unfortunately for investors, most portfolios fall substantially below the efficient frontier. BACK TO TOP Provides month by month suggestions and ideas to improve your financial life. National Association of Investors Corporation provides information on how to invest better.