Exam 1AM Q6B: The correct answer is that despite the fact that hedge funds increase your portfolio’s sharpe ratio, you should not pursue them becuse they have a very high correlation with the equity portfolio (0.85)
Exam 2PM Q51: The correct answer is to add hedge funds to the portfolio because they increase the portfolio’s sharpe ratio; no mention is made of the high correlation with the current portfolio (0.75).
any help?
Q51 -> they are using the if SR(Investment) > Correlation(INvestment, Portfolio) * SR(Portfolio) then by adding it in any proportion you would be increasing Sharpe ratio of the Portfolio. (improving risk adjusted return).
this is just to compare the 2 investments to see which one is a better addition.
hey cpk,
i see that they are doing that in Q51. my issue is that if you do that formula in 6B, you will end up with the conclusion that you should add the hedge funds (the share ratio of HS is 1.15, which is greater than the current portfolio sharpe ratio times the correlation.
so the question is why they are not being consistent in the two problems.
in one question the high correlation is the reason not to add the investment and in the other question it is ignored.
the other thing different here is
Existing portfolio is 60% eq & 40% bonds. IMO, we should be taking this portfolio’s sharpe ratio & multiply it with the correlation of hedge fund or the managed futures. If this is lower than the sharpe ratio of hedge funds or Managed futures, its should be added.
However in question, they are taking with either Equity+Hedge fund or Equities + managed futures