The Efficient Frontier is a fundamental concept in portfolio optimization that represents the set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of return. The efficient frontier is determined by plotting the risk (usually measured as standard deviation) against the expected return for a range of portfolios with different asset allocations.
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Minimum Variance Portfolio: The minimum variance portfolio is the one with the lowest risk on the efficient frontier. It seeks to minimize the portfolio's overall volatility by allocating assets in a way that reduces the covariance between them.
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Maximum Sharpe Ratio Portfolio: The portfolio with the highest Sharpe Ratio is known as the maximum Sharpe ratio portfolio. The Sharpe Ratio measures the excess return of the portfolio per unit of risk. This portfolio offers the best risk-adjusted return compared to other portfolios on the efficient frontier.
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Minimum Conditional Value-at-Risk (CvaR) Portfolio: Conditional Value-at-Risk, also known as Expected Shortfall, is a risk measure that quantifies the average value of the worst possible losses beyond a specified confidence level. The minimum CvaR portfolio minimizes the expected losses beyond a certain threshold, making it suitable for risk-averse investors.
Try out your own portfolio optimizaitions in the Google Colab Notebook