Improving the Efficient Frontier

Abstract

Familiar portfolio concepts can explain why pooling of investor capital enables investors to achieve higher expected returns without additional risk exposure. The risk of the pooled investment must be a particular weighted average of the participating investors' preferred risks. Unveiling of the source of expected return improvements provides a clearer picture of what pooling can achieve. A variety of formulas to allocate the realized return from pooling among participating investors should help portfolio managers design effective allocation methods.