Analyzing Portfolios

Portfolio managers concentrate their efforts on achieving the best possible trade-off between risk and return. For portfolios constructed from a fixed set of assets, the risk/return profile varies with the portfolio composition. Portfolios that maximize the return, given the risk, or, conversely, minimize the risk for the given return, are called optimal. Optimal portfolios define a line in the risk/return plane called the efficient frontier.

A portfolio may also have to meet additional requirements to be considered. Different investors have different levels of risk tolerance. Selecting the adequate portfolio for a particular investor is a difficult process. The portfolio manager can hedge the risk related to a particular portfolio along the efficient frontier with partial investment in risk-free assets. The definition of the capital allocation line, and finding where the final portfolio falls on this line, if at all, is a function of:

• The risk/return profile of each asset

• The risk-free rate

• The borrowing rate

• The degree of risk aversion characterizing an investor

Financial Toolbox™ software includes a set of portfolio optimization functions designed to find the portfolio that best meets investor requirements.

Warning

frontcon has been removed. Use Portfolio instead.

portopt has been partially removed and will no longer accept ConSet or varargin arguments. portopt will only solve the portfolio problem for long-only fully invested portfolios. Use Portfolio instead.