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Efficient Frontier

The Macroaxis Portfolio Efficient Frontier is yet another modeling tools which is based on mean variance optimization techniques introduced by Harry Markowitz in his paper titled 'Portfolio Selection' published in 1952. For any value of risk, investors like to choose a portfolio that gives them the greatest possible rate of return. With this module you can compute that efficient portfolio. It is a subset of Advanced Portfolio Optimizer which provides additional input into the optimization algorithm and uses investing ideas as possible models for portfolio origination.


Efficient Frontier model builds Markowitz Efficient Frontier that represents variously weighted combinations of the portfolio's assets. It identifies the optimal portfolio on the efficient frontier for your input.

How To Optimize Using Efficient Frontier

The best way to determine if your portfolio is optimal is to run Efficient Frontier several times replacing your current portfolio with resulted optimal portfolio after each iteration. You should stop this process when risk and return characteristics of both portfolios are the same (i.e. current and optimal portfolios simply overlap each other in the risk/return space)

Assumptions

The general assumption of this model is that only the expected return and the volatility (i.e. mean return and standard deviation) matter to the investor. The investor is indifferent to other characteristics of the distribution of returns. In this scenario the volatility is a proxy for risk, while return is an expectation on the future. Other assumptions include:
1. Portfolio return is the proportion-weighted combination of the assets' returns.
2. Portfolio volatility is a function of the correlation of the assets.
3. The change in volatility is non-linear as the weighting of the assets changes.
4. Returns are distributed normally and all investors have rational expectations
5. Investors are solely concerned with level and uncertainty of future wealth.
6. Risk-free rates is assumed to be 0 (zero).
7. All investors have the same expectations about security returns for any given time period.
Please note that changing model inputs can significantly alter your desired optimal asset allocation. Make sure you carefully select your inputs before running the model !


Please note, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) have recently merged. Although Macroaxis has implemented solutions to handle this transition gracefully, you may still find some securities that may not be fully transferred from one exchange to another.
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