Arithmetic and Continuous Return Mean-Variance Efficient Frontiers
Posted: 22 May 2019
Date Written: March 23, 2009
The arithmetic mean-variance efficient frontier shows that taking more risk is always rewarded with higher expected arithmetic return. However, expected arithmetic return is a poor indicator of long-term arithmetic return, which corresponds to expected continuous return. For the continuous return mean-variance efficient frontier, expected continuous return initially rises, then declines and becomes negative without limit as risk increases. Too much aggressiveness can lead to disaster, even without borrowing.
Keywords: Mean-Variance Frontier, Long-Term Return, Leverage
JEL Classification: G10, G11, G14
Suggested Citation: Suggested Citation