The Efficient Frontier Investment Concept

What is the Efficient Frontier and why do we use it?

The Efficient Frontier concept is successfully employed in the petroleum exploration industry as a portfolio risk assessment tool in an industry which often has a 90% failure rate.

The Efficient Frontier investment approach used in the Archimedes Financial Planning methodology was developed by Noll Moriarty using his high level maths ability, along with his 20 years experience in the petroleum exploration industry and 10 years in finance. It is unique to Archimedes Financial Planning.

Efficient Frontier is used to optimise returns on investment portfolios. It examines 3 variables - risk, return and correlation coefficient.

Proven success rate for the Efficient Frontier.

The Archimedes Financial Planning Efficient Frontier’s success rate has been proven over 10 years in the Financial Planning industry.

See an independent validation of our results using Efficient Frontier, (pdf 111kb) showing lower risk and higher return when compared to all other companies from the Mercer Database.

Maximising returns by assessing portfolio risk levels

The most important factor affecting a portfolio return is not the quality of individual investments, instead is the asset allocation, where different amounts of capital are allocated in different areas of your portfolio to make sure its capital is diversified to target above-average returns.

Typically people select investments by focusing on past or expected returns. This is a 1-Dimensional investment approach, and often does not work. The process for optimising a portfolio performance is a complex mathematical procedure. Rewards are there for those who can use it, but these are few.

Sophisticated investors use Portfolio Management, which is equivalent to 3-D investment analysis. The key concept is the Efficient Frontier, originally proposed by Nobel Prize-winning economist Harry Markowitz in the 1950s.

The Efficient Frontier brings in two more dimensions of an investment's quality - the volatility (“risk”) and correlation of returns with other investments.

This ensures that when a portfolio is formed, the expected returns are maximised for a person's tolerance of volatility (commonly known as ‘Risk Profile’).

Above-median returns can be targeted, at the expense of the less sophisticated investors whose portfolios lie below the Efficient Frontier. (Note we are not believers in the Efficient Market Hypothesis).

Our approach is based on the integration of the best techniques of the petroleum industry (eg probability distribution of possible outcomes; determine lowside, median and highside; EMV; etc) and financial industry (using correlation coefficients).

While nothing can be guaranteed in life, there is no more rigorous strategy than the Efficient Frontier approach. Investing with the over-arching Efficient Frontier strategy reduces unnecessary risks to your hard earned $$.

The chart illustrates that there is a limited zone (just underneath the Efficient Frontier) where efficient portfolios are placed.

Inefficient portfolios generate unnecessarily low returns, given their volatility (levels of risk).