Question

Assets should be considered to be included in a portfolio

A. if the asset class Sharpe ratio exceeds the product of the existing portfolio’s Sharpe ratio and the correlation between the asset class return and the portfolio’s return

B. if the asset class Sharpe ratio equals the product of the existing portfolio’s Sharpe ratio and the correlation between the asset class return and the portfolio’s return

C. if the correlation between the asset class return and the portfolio’s return is negative

D. if the asset class Sharpe ratio exceeds the existing portfolio’s Sharpe ratio

Answer 1

If the sharpe ratio of new asset is greater than the sharpe ratio of the existing portfolio times the correlation of the existing portfolio with the new asset than one should include the asset into the portfolio.

So the correct answer would be option (a) which says if the asset class Sharpe ratio exceeds the product of the existing portfolio’s Sharpe ratio and the correlation between the asset class return and the portfolio’s return .

Rest of the options are false because they state otherwise.

So only the correct answer would be option (a).