Easy PM True or False

JasonU Wrote: ------------------------------------------------------- > no but it is the benefit from diversification not > diversification itself. > > If you have one stock and you want to add another > stock > > if the second stock has a +1 correlation, a > perfect positive linear correlation, it adds zero > BENEFIT from diversification, but it is > potentially adding some diversification (if it is > a different stock) > > if the second stock has 0 correlation, you are > guaranteed to be adding maximum diversification > but the BENEFIT from diversification does not > improve > > if the second stock has -1 correlation, a perfect > negative linear correlation, it adds maximum > BENEFIT from increased diversification but not > necessarily more diversification (if it is > shorting the same stock) You understand the concept, but you’re overthinking this. Just remember, diversification is maximized with less correlation and more securities (benefit increases at a decreasing rate).

jainan33 Wrote: ------------------------------------------------------- > I found this in CFAI EOC summary yesterday: > > Include asset in portfolio if Sharpe Ratio of > Asset > (Sharpe Ratio of PF)*(Correlation with > PF) > > Damn Schweser never mentioned this and CFAI has it > in EOC Summary Don’t you hate that - don’t look at CFAI shit now!!! NO good can come of it!

you can add risky assets to the portfolio as long as the sharp ratio doesn’t go below the level of without that asset.