What is meant by the term 'dominance' in portfolio management?

The term 'dominance' in portfolio management primarily refers to the concept of portfolios being compared based on their risk-return profiles. When it is stated that portfolios on the efficient frontier dominate others, it means that these portfolios offer the highest expected return for a given level of risk, or the lowest risk for a given level of expected return.

In other words, any portfolio that lies on the efficient frontier is preferable to any portfolio that lies below it because it provides better potential outcomes for the same risk level. This concept is crucial for investors seeking to optimize their portfolios, as it helps them identify the most efficient investment options. The efficient frontier represents the best possible combinations of risk and return, and thus, portfolios in this realm are characterized as dominant because they outperform other portfolios that do not maximize their risk-return relationship.

This understanding is essential for effective portfolio management, as it guides investors in making choices that align with their risk tolerance while maximizing potential returns.