Efficient Frontier: what is it actually optimizing?

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Efficient Frontier: what is it actually optimizing?

posted Nov 27, 2016

Hi team,

I followed the following in optimizing a portfolio:
https://www.quantopian.com/posts/the-efficient-frontier-markowitz-portfolio-optimization-using-cvxopt-repost-cloning-of-nb-now-enabled

See my version:
https://github.com/yanwu26/public_code/blob/master/python/Efficient%20Frontier.ipynb

I am trying to understand what it's trying to understand what the optimizer is trying to optimize. The QP returns a weight vector. I calculate the return by using weight.T.dot(pbar) and then I calculate the standard deviation by using weight.T.dot(S).dot(weight). When I plot the intersection, it's not anywhere on the efficient frontier.

I would expect that the optimal optimal portfolio is based on the risk free rate, that is tangential to the efficient frontier curve:

https://www.glynholton.com/wp-content/uploads/2013/06/exhibit_capital_market_line_1.png

Does anyone know why the portfolio thats generated doesn't seem like it's correct? Thank you.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.