In one of the previous posts, we introduced the Alpholio™ app for Android. This post is the sixth one in a series covering the app’s services in more detail.
The Efficient Frontier service produces efficient frontier charts for a portfolio in the specified time frame. A full explanation of the efficient frontier and modern portfolio theory (MPT) is beyond the scope of this post. Among other places, you can find a good coverage of these concepts here and here.
To access the service, start the app, open the navigation drawer and tap the Efficient Frontier item:
This will open a new screen, on which you can enter inputs for the chart. To expand the Dates and Return Frequency sections, simply tap each section header:
The Positions, Dates and Return Frequency sections are identical to their counterparts in the Portfolio service described in the previous post. However, settings for the Efficient Frontier service are separate from those of the Portfolio service.
After you specify all parameters, tap the Get Efficient Frontier button. If any of your inputs are invalid, you will see a brief pop-up warning. If all settings are acceptable, they will be saved on the device for subsequent use. Please note that to generate the chart, your device must be connected to the Internet.
When the app obtains and processes the data, you should see the following screen:
The first thing you may notice is that the chart begins in October 2003 and not January 2000 that was specified as the From date. That is because the inception date of AGG was in September 2003 and the first full month of returns for this ETF was the following month. The app automatically selected the largest possible date range for the analysis.
The efficient frontier (EF) is plotted in two sections: a small red one below the minimum-variance portfolio (MVP) and a large blue one above it. The capital allocation line (CAL) touches the upper EF section at the tangency portfolio (TP) point. Finally, the current portfolio (CP) is shown as a point inside the EF.
To zoom in on a portion of the chart, tap the + button or use a spread gesture. To scroll a zoomed-in chart horizontally or vertically, use a corresponding swipe gesture. To zoom out, tap the – button or use a pinch gesture. To immediately restore the chart to its original view, tap the 1:1 button.
Below the chart, there is a Statistics section that can be collapsed and expanded by tapping its header. The section contains precise expected-return / standard-deviation coordinates for the MVP, TP and CP. It also provides the risk-free rate and the maximum Sharpe ratio (that of the TP).