Question

How does efficient frontier analysis (EFA) differ from other forms of complex risk assessment techniques? What limitations might an analyst encounter through the use of EFA? How can efficient frontier analysis results be communicated and utilized with non-mathematical decision makers?

Answer 1

Answer:

Check the following explanation

Explanation:

Efficient frontier analysis gives the highest level of expected return for any given level of risk and any combination of assets in the portfolio. It accesses the risk vs. return for an investment portfolio. The main difference in efficient frontier and other risk assessment techniques is that it gives the highest level of portfolio return at any given level of risk and the financial values of the individual assets are key to the analysis.

The problems faced by analyst while using efficient frontier analysis is misunderstanding of the nature of an efficient frontier model and the assumptions on which it relies. It is just like giving the powerful tool on the wrong hands. Efficient frontier models rely on historical data and relationships to generate the "perfect" portfolio. It treats investing as a science as only a few minimal alterations in the expected returns, standard deviations, and correlations of an asset portfolio will result in dramatically different asset allocation based on efficient frontier analysis. So we an investor cannot know in advance the exact levels for returns, correlations, and standard deviations as assumed by an efficient frontier model. Analyst need to put some constraint on asset portfolio to make it an effective model such as international assets not exceed 30 percent or 40 percent of the portfolio.

Before communicating the results of analysis the analyst should consider the goals of the decision makers and then logically design the communication. Making sure all participants understand by incorporating practically-obtainable information. A focus grid could be used to determine which content areas should be included, and which 8 might be omitted while delivering the results. Written reports, electronic communications and well-documented analytical models are important part of the plan. Slide presentations can be very effective.