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In Finance, what is an Efficient Portfolio?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2016
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Sometimes referred to as an optimal portfolio, an efficient portfolio is a financial portfolio that is organized in a manner so that a specifically expected return can be achieved. The methods of structuring the portfolio vary, depending a great deal on the degree of risk that the investor is comfortable with when it comes to acquiring securities. In some instances, the investor will choose to determine what securities are purchased based on the minimum level of risk necessary to earn the desired return.

A truly efficient portfolio will represent the very best selections of securities that the investor can currently afford to purchase and hold. In order to determine if the selection of securities is indeed optimal for a particular investor, it is important to consider the investor’s comfort level with risk, the current financial circumstances of the investor, and the stated goals for the performance of the assets within a specific period of time. It is important to note that what constitutes an efficient portfolio for a given investor today may not be truly optimal a year from now. Should any of these three factors change, it would be necessary to re-evaluate the holdings within the portfolio and determine what must be changed in order to optimize the collection of securities under the new circumstances.

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Building an efficient portfolio is not as easy as it may seem on the surface. There is no one ideal strategy for achieving the perfect balance of securities with the right level of volatility and a desirable rate of return. Some investors find that the inclusion of securities focused in a certain market sector can help move them toward the goal of an efficient portfolio with an emphasis on taking on the lowest risk for the highest possible amount of return. Others may find that going with an eclectic mixture of stocks, bonds, property, and currency trading achieves the goal of the desired return while also keeping the risk within acceptable levels.

Because the creation of an efficient portfolio is tied so closely with the goals of the investor, it is often a good idea to consult a financial professional, such as an investment broker, when attempting to build this type of optimized portfolio. The process usually does not come together overnight; in fact, it may take months or even years to come up with the ideal combination of assets to achieve the right balance. Patience, as well as remaining open to the possibilities of different combinations of securities, can help the investor eventually discover the ideal scope of investments and enjoy the benefits of a truly efficient portfolio.

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