Questions on Asset Allocation

CFA Level III Portfolio Management
#1

  1. An asset class should have high positive correlation of assets within a class. Why?

  2. “Presuming two asset classes have similar standard deviations and correlations to the existing portfolio, it will be beneficial to add the asset class with the higher expected return to the portfolio.” This statement is incorrect. Why?

#2

all assets in the asset class need to be homogenous. one measure of homogeneity is that the assets have high positive correlation with each other.

the right way to add another asset class to a portfolio is if SR New Asset Class > Correlation (Portfolio, Asset Class) * SR Portfolio.

SR = Sharpe Ratio