What is an Optimal Portfolio?

Malcolm Tatum
Malcolm Tatum

Also known as an efficient portfolio, an optimal portfolio is a collection of assets that are adequately helping an investor to reach his or her financial goals. A portfolio of this type is configured to include assets that the investor feels comfortable with, and that carry a level of risk that fits in well with the overall investment strategy that the investor employs. Determining whether or not a portfolio is efficient or optimal is somewhat subjective, since what is a good fit for one investor may or many not serve the needs of a different investor with equal ability.

The optimal portfolio focuses on stocks, commodities, and other investments.
The optimal portfolio focuses on stocks, commodities, and other investments.

In order to determine if a portfolio is truly optimal, it is important to look closely at investor preferences and goals. This often involves assessing the general approach of the investor to finances in general. Someone who is very conservative with money may be highly uncomfortable with the purchase of assets that carry a high rate of volatility. When this is the case, the optimal portfolio design will be to acquire assets that carry less risk, but that still offer the best return possible for that level of volatility.

One of the main steps an average investor can is to invest in different types of industries with a view toward diversifying his or her portfolio.
One of the main steps an average investor can is to invest in different types of industries with a view toward diversifying his or her portfolio.

For investors who are willing to take more chances, a collection of somewhat conservative and lower yielding assets would likely be unacceptable. When this is the case, the optimal portfolio will focus on the acquisition of stocks, commodities, and other investments that provide the opportunity for a higher rate of return. While the opportunity to earn higher returns is present, the investments are also more volatile, which increases the possibility of incurring some losses along the way.

Many investors find that an optimal portfolio will include a range of investment options. The idea is that including several different types of investments helps to balance the portfolio in such as way that incurring a loss is less likely. For example, some would consider an optimal portfolio strategy to be the inclusion of a mixture of stocks with low, medium, and high rates of volatility, several bond issues, and a commodity or two. When one type of investment is experiencing some degree of downturn, the other types provide stability to the portfolio, with gains in the other sectors offsetting any losses in the one area.

The best way to develop an optimal portfolio is to work closely with a broker who can help an investor create the ideal investment strategy. This may take some time, as the broker and the investor learn how to work together, and as the investor becomes more familiar with what types of investments he or she is comfortable authorizing. With attention to detail and taking into consideration the factor of investor preference, it is possible to build the ideal portfolio that strikes the balance between risk and return, and helps the investor reach his or her financial goals.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Login:
Forgot password?
Register: