Page 92 - Ready Set Retire

Stephen J. Kelley

Figure 18: Markowitz's Efficient Frontier

The most efficient assets are those on the blue line. Inside the
blue line is inefficient, and outside the blue line is impossible.
The S&P 500 has a current standard deviation of around 18%.
The historical return for the S&P 500, however is around 11%.
While that sounds high, it must be balanced with the risk being
taken. The S&P 500 is represented by the star. Notice how it
provides the very same returns as an asset with lower risk than
a 40/60 bond/stock mix: around 11% (arrow #1). Yet it carries
a risk that is higher than a 100% stock portfolio (arrow #2).
To make it efficient, you must increase the gain to #2 or
decrease the risk to #1. Or, you could split the difference,
increasing returns and reducing risk (arrow #3). Looking at
this, how does an S&P indexed fund look now?

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