what is this formula…can someone explain? (Sharpe ratio of exiting portfolio) X (correlation of Bonds with existing portfolio)
theyre basically trying to figure out if adding a new investment class (bonds in your case) to the existing portfolio will add value. you’re forgetting the first part of that equation which goes: IF - sharpe of new > (sharpe of existing) * ( correlation of new asset class with existing) - THEN ADD THE NEW. This will increase the overall sharpe of the existing portfolio making it optimal.
thank you. that makes sense.