Module Overview
What does ‘optimized’ performance look like? How can I know whether I am leaving impact, financial returns, or both on the table?
The concept of the Efficient Impact Frontier offers a twist on the efficient frontier from Modern Portfolio Theory (MPT). In MPT, an ‘efficient’ portfolio offers the greatest financial return for a given amount of risk and for a given universe of possible investments. A portfolio is ‘inefficient’ if you can get more financial return without increasing risk, or vice versa, by changing the portfolio composition.
This module extends the two-dimensional frontier of financial risk and return to include a third dimension of performance: impact. A portfolio is on the ‘efficient impact frontier’ if it offers the greatest possible level of impact for a given amount of risk-adjusted financial return. This concept helps investors relate investment-level decision-making to portfolio-level impact and financial goals, in order to construct portfolios that optimize both impact and financial performance.
- The efficient impact frontier refers to the set of portfolios that offer optimal combinations of impact and financial performance. This framework helps investors think about the impact and financial performance of their investments in an integrated way, and relate investment-level decision-making to their portfolio-level impact and financial goals.
- There is no universal efficient impact frontier. Each investor’s efficient impact frontier depends on:
- Their impact and financial goals
- Their universe of possible investments
- The amount of capital they have to deploy
- There is no ‘best’ position on the efficient impact frontier. Different investors will target different positions on the efficient impact frontier based on their particular impact and financial goals.
Introduction to the Efficient Impact Frontier
The efficient impact frontier creates a bridge between impact and financial considerations, and between investment-level decision-making and portfolio-level performance. It provides a framework for integrated analysis and decision-making that does not assume or depend on one universal relationship between impact and financial performance (i.e., tradeoff or no tradeoff).
Worksheet - Plotting Portfolios on the Efficient Impact Frontier
As the course progress, it will become increasingly important to be able to fluently switch back and forth between portfolio-level and investment-level considerations and analysis. Practice makes perfect.
Worksheet - Impact Portfolio Construction Simulation
You can explore the concept of the efficient impact frontier with our impact portfolio construction simulation. This exercise will challenge you to construct a set of portfolios using real-world data that optimize performance for different impact and financial considerations. This simulation has been used by thousands of MBA students in combination with an associated Harvard Business School case study.
