Efficient frontier
The best expected return available at each level of volatility by re-weighting the holdings you already own, with your current mix plotted against it.
Formula
Expected returns shrunk 80% toward the holdings' average Covariance shrunk 25% toward a constant-correlation matrix
How to read it
A current mix well below the curve could, in this model, earn the same expected return with less volatility.
How to use it
Shows how far the current weights sit from the efficient set, and in which direction.
Limitations
Expected returns from a few years of history are unstable, which is why they are shrunk so hard: the curve is a picture of a model, not advice. No position may exceed 25% (or its current weight, if larger), a held position keeps at least 1%, and no new name is ever added. Needs three holdings and 60 shared days.
In Kereon
Portfolio · Analytics. Drawn from the same shrunk estimates at 24 points along the curve.
Also called: frontier, mean-variance, markowitz.