Efficient Frontier Modelling

An investment portfolio is said to reside on the 'efficient frontier' if it is expected to produce returns greater than other portfolios (i.e. with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.