AllocationADVISOR

Asset Allocation

What is the efficient frontier?

AllocationADVISOR uses mean-variance optimization to create a set of portfolios that maximize return for different levels of risk. A graph of this set of optimal portfolios is called the efficient frontier. AllocationADVISOR allows you to select portfolios from the efficient frontier for your asset allocation.

What is mean-variance optimization?

Mean-variance optimization was developed by Nobel Laureate Harry Markowitz as a way to create optimal portfolios based on risk and return trade-offs and the benefits of diversification. The optimization uses return, risk and correlation forecasts to combine assets into portfolios that maximize return for different levels of risk.

What is Monte Carlo simulation?

Monte Carlo is a complex mathematical technique, used for many years in other businesses from the space program to automobile manufacturing to medical research, which estimates the probability of meeting specified goals in the (uncertain) future. Monte Carlo simulation, in the investment world, helps you to understand the likelihood of achieving your goals given different investment portfolios, cash flows and inflation rates.

For more information about asset allocation, please see our article Asset Allocation.