Portfolio Optimization
Using math (like Modern Portfolio Theory) to find the mix of assets that maximizes return for a given level of risk.
What You Need to Know
Portfolio optimization compares thousands of asset combinations to identify efficient portfolios—those that deliver the highest expected return for the lowest possible volatility.
Key Tools:
- Efficient frontier (best risk/return trade-offs)
- Mean-variance optimization (uses expected return, volatility, correlation)
- Risk parity and minimum-variance portfolios for defensive investors
Practical Tips:
- Optimization relies on assumptions—stress test results before implementing
- Include constraints (max allocation per asset class, minimum cash)
- Revisit inputs annually as markets shift
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/asset-allocation
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Asset Allocation Planner
Build and stress test portfolio allocations with risk profiles, glide paths, and diversification metrics.
Portfolio Rebalancing Calculator
Calculate what to buy/sell to rebalance your portfolio. Tax-efficient strategies, rebalancing bands, and drift analysis
Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.