Portfolio optimization is the science of combining multiple assets to maximize expected returns for a given level of risk. Using Modern Portfolio Theory, investors can identify efficient portfolios that lie on the efficient frontier.
The Efficient Frontier
The efficient frontier represents the optimal combination of assets offering the highest expected return for each level of risk. Portfolios below the efficient frontier are inefficient—they offer lower returns for the same risk.
Mathematical Framework
Portfolio optimization uses correlation matrices and covariance analysis to find optimal asset weights. The goal is to minimize risk for target returns or maximize returns for acceptable risk levels.
Educational content only. Not investment advice.