What Is the Efficient Frontier?

By Adam Levy – Updated Aug 7, 2025 at 9:08 PM EST

Key Points

Efficient frontier visualizes optimal portfolios by balancing returns with risk.
Portfolios right of the efficient frontier yield poorer returns for higher risk.
Robo-advisors use this model to optimize and rebalance client portfolios.

The efficient frontier is the set of portfolios maximizing expected return for a given level of risk, as measured by the standard deviation of returns. Theorized by Nobel laureate Harry Markowitz, the efficient frontier is a cornerstone of his modern portfolio theory. Investors can use the efficient frontier to see the benefits of portfolio diversification in maximizing their returns for their given risk tolerance.

Loading paragraph...

Hand pointing to a pie chart on a tablet screen. — Image Source: Getty Images

Loading image...

Loading paragraph...

Graph depicting the efficient frontier of a portfolio consisting of hypothetical stocks and bonds. — Image Source: The Motley Fool

Loading image...

Loading paragraph...

Data source: Author.

Loading table...

Importantly, they also have a correlation of negative 0.3, which means when stocks go up in value the bonds will often go down in value and vice versa.

Here’s a sampling of some potential portfolios you could construct.

Loading paragraph...

Data source: Author.

Loading table...

A few things should stand out from the table above.

First, you can achieve lower variance in returns by adding stocks to an all-bond portfolio. As you add stocks, the standard deviation of returns goes from 10% down to about 7% with a 35% allocation toward stocks.

Second, the first few sets of portfolios are inefficient because you can achieve better returns at the same level of risk. The efficient frontier would start at the portfolio with about 35% allocated toward stocks and 65% in bonds and move up and to the right from there, as can be seen in the chart above.

Related investing topics

Loading paragraph...

3 Most Important Financial Statements

When researching companies, the financial statement is a great place to start.

How and When to Sell Bonds

Find out when selling bonds is a good idea and how to cash in yours.

Are Index Funds a Good Investment? Key Benefits to Know

So why would you want to invest in an index fund? We've got the reasons.

Loading hub_pages...

Loading paragraph...

About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

TMFnCaffeine

@admlvy

The Motley Fool has a disclosure policy.