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Efficient Frontier

There is far more to diversification than just simply investing across multiple "imperfectly correlated" asset classes. The challenge is how to choose the best combination of assets which offer the maximum expected return. As it turns out, there isn't just one optimal portfolio - but rather a series of optimal portfolios. In fact, for every level of return, there is one portfolio that offers the lowest risk, and for every level of risk, there is a portfolio that offers the highest return. These combinations can be represented graphically on a risk/return graph - and the resulting curve is known as the "Efficient Frontier". Portfolios lying on the "Efficient Frontier" represent the best combination of expected return/risk. An investor's position on the frontier will be determined by the maximum level of risk that he/she is willing to take on.

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