Sequence 01
Module 3

The Efficient Impact Frontier

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 the third dimension of 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 construct and optimize their portfolios for risk, return, and impact, using their own data and based on their own 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

See if you can construct an optimal portfolio from a real-world data set, using our portfolio construction simulation that has been used by thousands of MBA students in combination with an associated Harvard Business School case study.

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