On Page 409 of the curriculum (Portfolio management) it talks about adding the new asset to your portfolio.
It says that if the new asset’s sharp ratio is higher than the product of the current sharp ration and the correlation between the current and the new, then we should invest in the new asset.
I don’t quite get this.
Firstly, we are comparing the sharp ratios between two separate portfolios, why would you compare the new asset’s sharp with the current portfolios AND its correlation with the new when the new hasn’t even been added yet?