
Acme Widgets  FinBiz Inc.  InterNational Blivet  
74%  10%  16%  16.35%  13.06% 
MyPort consists of $74,000 worth of Acme Widgets, $10,000 of FinBiz Inc., and $16,000 of InterNational Blivet (the actual number of shares of each stock owned are immaterial for this analysis).
MyPort's present Risk/Return percentages are interpreted in the following manner: With a projected Return of 13.06% and a projected Risk of 16.35% over the next year, MyPort has a
68% probability of being worth between $97,000 and $130,000 by the end of the year. Perhaps more disturbingly, there is a slightly greater than 21%
chance that the value of the portfolio could be less than the original $100,000 invested  a one in five chance of loss.
What Is An Optimal Stock Portfolio?
An Optimal Stock Portfolio is a stock portfolio consisting of stocks proportionately configured in such a way as to generate the greatest or Optimal Return possible for the particular amount of Risk an investor is willing to accept.
Let’s start our search for an Optimal Portfolio by renaming "MyPort" Portfolio #10 and then constructing 9 random portfolios, each consisting of different proportions of the three stocks Amce Widgets Ltd., FinBiz Inc., and InterNational Blivet and comparing their Risk/Return results in Table 2 below:
Portfolio  Acme Widgets  FinBiz Inc.  InterNational Blivet  
Portfolio #1  32%  38%  30%  12.10%  11.51% 
Portfolio #2  68%  12%  20%  15.54%  12.76% 
Portfolio #3  27%  51%  22%  12.91%  11.59% 
Portfolio #4  20%  20%  60%  9.89%  11.00% 
Portfolio #5  60%  20%  20%  14.86%  12.71% 
Portfolio #6  12%  74%  14%  13.48%  11.22% 
Portfolio #7  15%  80%  5%  14.28%  11.40% 
Portfolio #8  38%  19%  43%  11.76%  11.71% 
Portfolio #9  42%  19%  39%  12.05%  12.49% 
Portfolio #10 (MyPort)  74%  10%  16%  16.35%  13.06% 
The important thing to notice in Table 2 is that each portfolio, due to its different stock proportion configuration, has a unique Risk/Return profile. In order to better visualize this, the data in Table 2 is illustrated in Figure 1 below.
The number to the right of each red diamond on the graph corresponds to the ID number of the portfolio in Table 2. The graph makes it easy to see that, for the most part, the higher the Return associated with a portfolio, the higher the Risk  an investing mantra you've no doubt heard before.
Now let's suppose that you are willing to accept a Risk of around 12% on your investment. Which portfolio should you choose? Let's look at the Risk/Return graph reproduced below in Figure 2 (portfolios #3 and #8 have been omitted to facilitate presentation). You will notice that Portfolios #1 and #9 each have a Risk of about 12% but their Returns are quite different. Portfolio #9 offers a Return of 12.49% whereas Portfolio #1’s Return is almost a whole percentage point less at 11.51%. The choice is rather obvious: for the same amount of Risk, i.e. about 12%, Portfolio #9 offers a Return superior to Portfolio #1. In this illustrative example, Portfolio #9 would be more "Optimal" than Portfolio#1 for an investor willing to accept an investment Risk of 12% .
If we continue to generate more random portfolios consisting of different stock percentage configurations a very interesting thing happens. For the sake of illustration let's generate 40 more random portfolios. The resulting graph is illustrated in Figure 3 below:
Perhaps the most striking visual detail in this new graph is the "boundary" (bold dotted line) that is forming. This boundary is known as the
EFFICIENT FRONTIER and upon it lie the Optimal Portfolios we are seeking  those portfolios that have the highest Return for a given Risk.
With only a total of fifty random portfolio configurations, the boundary is starting to take shape. Certainly the foregoing procedure can be
replicated generating and analyzing the entire "universe" of possible stock portfolio configurations, the end result being an efficient
frontier that would be "filled in" allowing you to choose the Optimal Portfolio for every possible Risk (within reason!).
Choosing Your Optimal Portfolio
As stated above, those portfolio configurations that "land" on the efficient frontier are Optimal Portfolios. Let's now create an Optimal Portfolio Table using our illustrative portfolio consisting of Acme Widgets, FinBiz Inc. and International Blivet. After creating and analyzing the entire universe of possible portfolio configurations consisting of these three stocks, the resulting Optimal Portfolios (in 0.5% Risk increments) are summarized in Table 3 below. For the sake of brevity the interval of Risk Percentages is from 9% to 14%.
Table 3 below is a very powerful investment tool that gives an investor the ability to choose that Optimal Portfolio for a particular Risk they are willing to assume.
Risk  Return  Acme Widgets  FinBiz Inc.  International Blivet 

9.0%  10.98%  10%  21%  69% 
9.5%  11.21%  18%  17%  65% 
10.0%  11.73%  21%  15%  63% 
10.5%  11.96%  28%  14%  58% 
11.0%  12.23%  22%  19%  61% 
11.5%  12.61%  30%  27%  43% 
12.0%  12.83%  28%  21%  50% 
12.5%  12.92%  37%  12%  51% 
13.0%  13.02%  30%  38%  32% 
13.5%  13.12%  26%  27%  47% 
14.0%  13.23%  21%  46%  33% 
Let's assume you are conservative and willing to assume a Risk to your capital of 9.50%. Looking at the Risk/Return Table for 9.50% Risk gives the following Return and stock configuration Table 4:
Risk  Return  Acme Widgets  FinBiz Inc.  International Blivet 

9.5%  11.21%  18%  17%  65% 
Simply put, there is no other portfolio configuration containing these three stocks (at this moment in time) that can give you a
Return higher than 11.21% for a Risk of 9.50%.
Optimal Isn't Forever
Unfortunately because the stock market is fluid even Optimal Portfolios tend to lose their "Optimality" over time. There is no such thing as "buy and forget" in serious portfolio investing. For this reason portfolio owners must regularly monitor their portfolio Risk/Return profile and make adjustments when necessary to regain Optimality.