Optimal Portfolio of Two Risky Assets with a Risk-Free Asset. CFA Exam. Essentials of Investments

In this video, I cover the concept of optimal portfolio. An optimal portfolio is one that occupies the ‘efficient’ parts of the risk-return premium spectrum. Optimal portfolio is a term used in portfolio theory to refer to the one portfolio on the Efficient Frontier with the highest return-to-risk combination.

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The optimal portfolio concept falls under the portfolio theory.

The theory assumes that investors fanatically try to minimize risk while striving for the highest return possible.

The theory states that investors will act rationally, always making decisions aimed at maximizing their return for their acceptable level of risk.

The optimal portfolio was used in 1952 by Harry Markowitz, and it shows us that it is possible for different portfolios to have varying levels of risk and return