The efficient portfolio frontier is the set of the most efficient portfolios in a market, that is, those that offer the highest expected return according to the different levels of risk that can be assumed (or the lowest risk for an expected return).
It is represented graphically as a curve, where any portfolio that is not above the border line will not be efficient, and therefore will be running unnecessary risks or receiving a lower return than it could obtain, with respect to the risk that is assuming Therefore, the efficient portfolio frontier represents the optimal relationship we find in an investment portfolio between volatility and profitability , that is, between the benefits that the investor will be able to obtain and the risks that he will have to face in order to do so.
In the financial world there is usually a positive relationship between risks and profitability , the greater the profitability the greater the risk, since if in a project the possibility of suffering losses is greater, the debtor will have to offer greater benefits to the creditors , and otherwise it will be Very difficult to obtain financing. At the border of efficient portfolios , risk-free assets are the minimum variance portfolios and are located to the left of the border. As the risk increases, profitability also increases.
This relationship between risk (whose measure in finance is usually volatility, represented by standard deviation) and profitability (as a percentage of the nominal amount invested) can be plotted with a curve that represents the efficient portfolio border (the blue line in the graphic above) . This curve is also called the “Markowitz border” and serves as a reference for rational decision making on investment projects.
There is no common Markowitz border to all portfolios and situations, since in each case the values will change according to the market situation. If assets with less risk offer near-zero returns, this will push the curve down and force investors to face more risks to obtain the same return as before.
Finally, it is important to point out that the market situation (that is, the relationship between profitability and risk to which all agents are subjected) is the one who defines the shape of the curve, but from then on it is each investor who decides on which point of the Markowitz border it should be positioned. Thus, while the more conservative will look for positions in the left zone of the curve (where volatility is closer to zero), those with less risk aversion will do so in the right zone, in search of a higher return even under the possibility of suffering greater losses.