Question

1. (Asset Allocation) Assume your current portfolio has a Sharpe ratio of 1.50. You are considering adding a new asset to the portfolio which only has a Sharpe ratio of 1.25. The asset has a 0.80 correlation to the current portfolio. Based on this information alone, you should add the new asset to the portfolio. Evaluate the underlined words in italics.

1. True
2. False

2. (Fixed Income) Effective duration is a more accurate measurement of an instantaneous parallel change in the yield curve during a low interest rate regime (e.g. the last decade) than it is during a high interest rate regime (e.g. the 1980s). One explanation of this relationship involves a bond’s price convexity. Evaluate the underlined words in italics. True or False?

1. True
2. False

Answer 1

1 . The given statement is TRUE as sharpe ratio of one or more than one is generally preferred by the investor as that would mean that the stock would yield the maximum rate of return for the minimum amount of risk. The ratio of more than one should also be considered because they are there more highly preferable..

SRP ratio of 1.25 and correlation of.80 means that overall return would be expected in the range of [1.25× 8 ]equals to the sharpe ratio of 1, which is always considered as an investible and includible criteria for any stock into the portfolio. So, this stock should be added into the portfolio

So the given statement isTRUE.