The following I put in the L2 forum(I am an L2 taker) but not got any clue to the 2nd and 3rd part of the question, so need help from you guys on the 2nd and 3rd part of the question. Many thanks in advance. I have a portfoio worth $100,000. My existing portfolio’s Sharpe Ratio is 0.12. I am thinking of taking another stock into my portfolio whose Sharpe Ratio is 0.10. I have calculated that the Correlation between my existing portfolio and the new stock is 0.3. Can I take the new stock into my portfolio, if I do what will be the Sharpe Ratio of my new portfoio? Also, if I decide to take the new stock into my portfolio, what will be the optimal weightage ratio of that new stock and my existing portfoio so that the new Sharpe Ratio is maximum?
dont mess with L3 when we in the midst of preparing for the test fool
Wake2000, We all are in the middle of preparation and the question posed was closely related to the PM concept which carries maximum weight in L3. , if its beyond your capability just ignore it and get on with your life, your 2 cents is not required.
sasanksm if it is so important to you, go figure out. otherwise, it is not part of LOS, so learn it after Jun 4th if you know it is covered in L3 - then when you get to L3 - you will learn it. Not relevant to you at this time.
It’s part of the L3 curriculum I remember this being on the CFAI books of level 2 last year. The rule is that is the SR of the new stock is greater that the SR or the existing portfolio multiplied by the correlation, then you should add the security. In your case, 0.1>0.12*0.3, so you can add the security. As far as the weight is concerned, you don’t provide enough data to give you an answer and it’s not a long process/
the 0.1 > 0.12 * 0.3 is covered in both L2 and L3. I was answering about the actual formation of the portfolio.