Efficient Surface

Categories: Technical Analysis, Investing and Trading,

Three-dimensional diagram used as a visual aid for understanding the interactions between multiple risks and the accompanying returns in order to construct efficient investment portfolios. To draw this diagram, three variables (expected return, standard deviation, and tracking error) associated with the different asset-allocation choices or portfolios are plotted along the three axes of a graph. The resulting shape (a distorted solid or plane) depicts the interplay of different scenarios, and shows the expected returns in relation to volatility (standard deviation) and time (tracking error). It is an improvement upon the efficient frontier method, which is a two-dimensional risk-reward graph that shows expected return and standard deviation without the effect of time. also called efficient plane, efficient surface frontier.