### Why the Efficient Frontier Is Unstable?

**March 21, 2013** - Strategic Allocation

How stable is the mean-variance efficient frontier specified by Modern Portfolio Theory (MPT), and what drives changes to it? In his March 2013 paper entitled “Principal Component Analysis of Time Variations in the Mean-Variance Efficient Frontier”, Andreas Steiner applies principal component analysis to explore sources of the variability in the efficient frontier. He uses weekly data and rolling 52-week intervals to calculate the efficient frontier (via asset returns, volatilities and correlations) for a long-only, unleveraged portfolio of 22 Swiss stocks. He next discovers purely statistical independent linear factors needed to describe efficient frontier variability (using ten sample points along each efficient frontier curve). He then measures the relative importance of the factors and relates them to common investment performance statistics (average returns, volatilities and correlations). Using weekly returns for the specified stocks during late June 2002 through December 2012 (549 weeks), *he finds that:* Keep Reading