Planit:Efficient Frontier Calculator
This calculator allows advisors to design unconstrained or constrained portfolios using William Sharpe’s Efficient Frontier modeling and a unique calculation of the “inefficient frontier” developed by PlanPlus to illustrate the entire universe of possible risk/return portfolios.
The user can push the resulting asset allocation from the Efficient Frontier Calculator back to the Asset Allocation so that the efficient modeled portfolio becomes the client’s target.
To use this calculator, first identify on the left hand side of the screen any constraints that you want to take into consideration in the design of the portfolio. For example, you may want to have a minimum of 10% of the portfolio in cash. In that case you would set the Minimum Cash to 10%. You can leave the Maximum at 100% allowing the calculator to identify the most efficient portfolio within that range.
Another example might be to set a maximum weighting in Real Estate. Often when doing efficient frontier modeling, an unconstrained portfolio will include a high percentage of Real Estate. That’s because the historical performance and risk associate with this asset class in many jurisdictions correlates well with other asset classes. However, sometimes concerns for liquidity and the desire for a more diversified portfolio will mean you don’t want to recommend 50% Real Estate even if the historical risk/return associated with this asset class is efficient. Setting a maximum of perhaps 15% would allow the calculator to include Real Estate, but limit the weighing to this overall maximum.
On the right hand side of the screen you’ll find fields where you can define what information you want to display on your resulting report. These include:
Asset Classes – Will show you where on the frontier each of the asset classes in the system would appear on the efficient frontier assuming a portfolio that was allocated 100% into each asset class.
Model Portfolios – Will show you the positioning of the standard portfolios available in the deployment. In our core systems, this would be the Very Conservative; Conservative; Moderate; Aggressive and Very Aggressive portfolios.
Current Portfolio – Will show where the client’s current portfolio is positioned on the efficient frontier.
Target Portfolio – Will show where the client’s target portfolio is positioned on the efficient frontier. This may be one of the standard portfolios or a custom portfolio if that’s what you used on the Asset Allocation screen.
This allows you to identify if you want the calculation you do to identify the portfolios based on a target rate of return or a target level of risk. Hence you can say you want to see all portfolios that have a return of 9%. You’ll then see all portfolios with all levels of risk that result in this target rate of return.
Once you have set all of the above items, click on “Calculate” to see your results.
You’ll only use this button in cases where you want to send the information for the most efficient portfolio based on your constraints to the Asset Allocation screen to become a custom target for your client.