Tangency portfolio
The portfolio on the efficient frontier with the highest ratio of excess return to dispersion: where the frontier touches a line drawn from the risk-free rate.
How to read the number
Combined with the risk-free asset it produces any level of risk through a simple change of proportions, while the set of risky holdings stays the same.
When the metric lies
The location of the touching point is decided entirely by expected returns, and those carry a large estimation error: a small change in assumptions moves the point and rearranges the weights beyond recognition.
Also known as: maximum sharpe portfolio