This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 6 of 13 · 12 min
Minimum-variance and efficient frontiers
Of all the portfolios risky assets can form, only those on the upper half of the minimum-variance frontier, the efficient frontier, are worth holding.
In short
- The investment opportunity set is every risk–return combination that can be built from the available assets.
- Adding an asset class that is not perfectly correlated pushes the opportunity set northwest.
- The minimum-variance frontier holds the lowest-risk portfolio for each level of expected return.
- Its leftmost point is the global minimum-variance portfolio: no risky-asset portfolio has less risk.
- The part of the frontier above the global minimum-variance portfolio is the Markowitz efficient frontier; the part below is inefficient.
- Along the efficient frontier, each extra unit of risk buys less and less extra return.
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