All optimized portfolios can be graphed on two axes: yield and risk level. We can then draw a line connecting the points that represent all these portfolios. This line is called the efficient frontier and it is the boundary between the possible but not optimized below, and the impossible above.
The line goes up from left to right, eventually becoming almost horizontal, i.e. parallel to the axis representing risk levels. This reflects the fact that at very high levels, risk no longer translates to higher yields.
The curve doesn’t bend. Unlike other measurement curves, the efficient frontier cannot twist and turn up and down. If it does, something is wrong.
The scale is made up of one horizontal axis that contains all possible risk levels that users can generate and a vertical axis made up of the possible yields for up to 15 portfolios. The two axes cross at (0,0).
In practice, the frontier will start on the vertical axis with the most solid portfolio with the lowest yield and on the horizontal axis from the lowest possible risk level and travel up and to the right.
Cherries will complete all this analysis and graph the efficient frontier automatically. You can choose any portfolio at any risk level you'd like, but according to Nobel Memorial Prize Laureate in Economics Professor Bill Sharp, there are two portfolios which can be especially interesting to investors: the Maximum Variance Portfolio (MVP), which is the optimal portfolio for the lowest risk level possible, and the Tangent Portfolio (TP), which is the optimal portfolio with the highest ratio between rates of return and the risk it entails. CHERRIES offers you quick access to either one of them. You can select any portfolio by clicking on it. The selected portfolio will be displayed. As long as you are in the New Portfolio Analysis page, you can continue reviewing the portfolios. The portfolio you select before leaving the page is the one that Cherries will track.
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