Markowitz Efficient Set

Categories: Financial Theory

Nobel Prize-winning economist Harry Markowitz, father of modern portfolio theory, brought economics into the investment world. The Markowitz efficient set describes a portfolio of assets with Pareto optimal risk-return combinations.

The idea is that the two main criteria for investors are risk and return, which can be graphed as the Markowitz efficient frontier. Not too different from the production possibilities frontier, if you’re familiar with that.

Given an investor’s chosen risk level, there’s an “efficient set” of possible solutions...basically the smartest portfolio options (highest return) for the given risk level. As with the production possibilities curve, efficient options lie on the curve.

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