Let’s move on from Part I of this blog series on the Efficient Frontier, formulated over half a century ago by Harry Markowitz, to the New Frontier postulated by investment advisor Richard Machaud. Michaud is the author of Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (Oxford University Press, 2008), among other works.
Michaud’s New Frontier adds further sophistication to Markowitz’s ideas about optimizing investment diversification to balance risk and return by introducing resampling to the optimization process. Resampling is a method from statistical analysis that compensates for possible error by analyzing a dataset from which a subset has been portioned off and replacing values in the initial analysis with randomly sampled values from the subset.
More specifically about the New Frontier technique, Michaud adds resampling capability to Monte Carlo simulation. According to one commentator, this "allows managers to assign a greater range of probabilities to various outcomes. The goal is to produce a more realistic portfolio based on a more realistic frontier."
Resampling functionality is part of @RISK, enabling you to perform New Frontier analyses right in your spreadsheet models.