The investor from Tutorial 2 — Portfolio Allocation Model has $100,000 to invest in four assets. Below is a relisting of the investor’s expected annual returns, and the minimum and maximum amounts the investor is comfortable allocating to each investment.
When the investor maximized the portfolio return without regard to risk, OptQuest allocated almost all the money to the investment with the highest return. This strategy didn’t result in a portfolio that maintained risk at a manageable level. Only limiting the standard deviation of the total expected return generated a more diversified portfolio.
Efficient Frontier Analysis examines the reasons for this.