MPT - Efficent Frontier

[blinkau]

Hi Guys iv been reading alot of literature on the efficient frontier lately. I can understand it but can't understand how a portfolio can be outside the efficient frontier? I have seen some sites which have portfolios marked outside the line and they state its unachievable to hold portfolios outside the efficient frontier.

What I was wondering is can a portfolio be held outside the frontier? if so I mean what would you hold in it? I assume less risky assets like property?

 

[surfingman]

If the stock is outside the efficient frontier it's not a good investment.

The efficient frontier is all about risk and return, a stock can be held outside the efficient frontier but it would have a high risk with little return and therefore you would not want to hold it.

The efficient frontier is for a portfolio of assets, I have only ever seen it used with stocks.

 

[tech/a]

Efficiency Frontier.

A favorite topic because its based upon my other favored topic.

RISK REWARD.
Left scale is reward
Bottom scale is risk.

There are a zillion ways to trade and as such a zillion results that will be achieved.
Each will plot a dot on the Risk/Reward scale after we know the return on the risk we take on anyone of the trading methods we choose to plot.

Those with great return to risk will plot higher and to the left of the dot matrix.
Those with crap returns will plot lower and to the Right.
Eventually you can draw a line on the outside left edge to the top of the scale.
That is the efficiency frontier.Everything will fall at some place within the Right and lower end of the efficiency frontier.
A plot on the outside or left of the efficiency frontier just alters the position of the frontier.

So its not possible to trade outside the frontier as you would simply just be re definining it.

Sorry about the crappy drawing.
But I think you get the idea---well hope you do.

 

[blinkau]

Thanks Surfingman! So from what I understand if you hold a portfolio inside the frontier it is inefficient due to say high risk for expected return while anything on the fronter is efficient as its risk/return match while anything outside on the capital market line is either a low-risk/low-return situation or high-risk/high return situation?

So if you held something outside the frontier on the CAL line what would it be? As according to MPT isn't it impossible to hold stocks out there?

Ah now I am confusing myself haha

 

[tech/a]

So if you held something outside the frontier on the CAL line what would it be? As according to MPT isn't it impossible to hold stocks out there?

Ah now I am confusing myself haha

So its not possible to trade outside the frontier as you would simply just be re definining it.

 

[surfingman]

So if you held something outside the frontier on the CAL line what would it be? As according to MPT isn't it impossible to hold stocks out there?

Thats the reason for this is to be efficient with your investing so you don't want to be at extremes as per on the cal line (as tech stated you would readjust the frontier to suit), the stocks that fall on the upper half of the frontier are stocks you should include as they have best possible profits with least amount risk from the selection of stocks you included in the research.

If they fall inside the frontier or on the bottom half of the frontier line they are inefficient therefore don't include them.