WE highlighted two weeks ago that portfolio optimisation can be perceived as the “free lunch in investments,” as you gain additional expected returns without taking on more risk or by minimising risk for a given level of expected returns. In order to fully appreciate the optimisation concept, investors need to be familiar with concepts such as risk or volatility and risk-adjusted returns, asset correlation and the efficient frontier.
We explained the risk and risk-adjusted returns concept previously. To recap, risk or volatility is the quantifiable likelihood of loss or lower-than-expected returns. It measures the uncertainty of expected return using a statistical measurement called standard deviation. Risk adjusted return measures the return an investment makes in relation to the amount of risk it takes on.
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