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What are the uses of Efficient Frontier Analysis in SRM?
In current portfolio theory, the efficient frontier, also known as the portfolio frontier, is a collection of ideal or optimal portfolios meant to deliver the best return for the least risk. It is deemed adequate if no other portfolio offers higher returns for a lower or similar amount of risk. The level of hazard resistance of the financial backer determines where portfolios are located in the practical wilderness. It’s a risk-return portfolio that includes the “efficient” parts of the risk-return spectrum. Portfolios that cluster to the right of the efficient frontier have a higher level of risk than portfolios that cluster to the left of the efficient frontier, making them sub-optimal.
A bent line represents the efficient border—each increase in risk results in a somewhat lower profit level. The standard deviation as a proportion of danger is plotted on the x-axis, while the expected profit is plotted on the y-axis. It explains how the risk-return trade-off in a portfolio works. In other words, when the marginal return to risk decreases, a curve emerges. As a result, the ideal portfolios on the effective frontier have a higher degree of diversification than other portfolios.