How does Floodlight define the Efficient Frontier?
The Efficient Frontier is calculated using constrained mean-variance optimization based on Floodlight’s Capital Market Assumptions. The Efficient Frontier is a multi-step Efficient Frontier which provides the best indication of the type of performance that an investor might actually achieve over the long-term. (Technically, what this means is that the returns shown are geometric returns, as opposed to arithmetic returns which are upwardly-biased estimates of actual, realizable performance.) Constraints were put on the weights to both individual asset classes and groups of asset classes to produce results that are robust and that recognize a degree of uncertainty in the Capital Market Assumptions in forecasting future market performance. For each currency, there are two efficient frontiers that are made available to you: one that includes alternative investments, and one that excludes alternative investments (using only equity and fixed income).
