Investment Smarter: Use an Efficient Frontier Calculator
An efficient frontier calculator takes each asset's expected return, volatility, and the correlations between assets, and finds the portfolio weights that give the highest expected return for each level of risk. The set of those portfolios is the efficient frontier. You then pick the point on the frontier that matches your risk tolerance. The output is only as good as the inputs: expected returns and correlations estimated from history can change, so treat the result as a starting allocation, not a forecast. This article is educational, not investment advice.
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Understanding Investment Portfolio Optimization and Risk and Return
Understanding investment portfolio optimization or financial modeling is the first step towards creating the best asset allocation for an investor. Investment asset allocation strategy is about making balanced investments in different kinds of securities to seek a target return or reduce portfolio risk. This process includes understanding Modern Portfolio Theory that was developed by Nobel-prize winning economist Harry Markowitz in 1952.
Using an Efficient Frontier Calculator
An efficient frontier calculator shows which mix of assets is efficient for a given risk level. When you know your required return or your maximum acceptable volatility, you read the matching portfolio off the frontier.
The efficient frontier calculator uses the variance-covariance approach, which helps to generate the best possible combination of risk and return ratio for different asset classes. This approach also takes into account the asset correlation and covariance matrix as well as the risk aversion of investors.
Reducing Portfolio Risk and Maximizing Investment Return
An efficient frontier calculator reduces risk through the mix of assets, not by picking a single asset class. Combining assets that are not perfectly correlated lowers portfolio volatility, so a diversified mix can have less risk than its individual parts for the same expected return.
The efficient frontier calculator can thus help investors make the correct decisions to either minimize risk or maximize return.
About MarketXLS
MarketXLS is an Excel add-in that pulls historical prices (for example with =QM_GetHistory("SPY")) so you can compute the returns, volatilities, and correlations an efficient frontier needs, plus value-at-risk (VaR) and return analysis. For a no-code option, the FundXLS Portfolio X-Ray shows where an uploaded portfolio sits relative to the efficient frontier.
To learn more about MarketXLS, please visit MarketXLS value-at-risk guide and MarketXLS Charles Schwab integration guide.
Browse ready-made portfolio spreadsheets in the MarketXLS templates library.
Relevant blogs that you can read to learn more about the topic
Efficient Frontier Using Excel (With Marketxls)
Charles Schwab-Portfolio Management And Exporting To Excel
Modern Portfolio Theory (Application With Marketxls Portfolio)