New asset class and risk of portfolio

CFA Level III Portfolio Management
#1

When asked to determinne the effect of a new asset class to the overall risk of the portfolio what do we compare?

  1. The standard deviation of the new asset class VS the standard deviation of the portfolio

  2. The correlation of the new asset class with the portfolio

  3. Sharpe ratio of new class VS sharpe ratio of portfolio

#2

Add if Sharpe of Current Portfolio x correlation of Portfolio and investment is < Sharpe of new investment

or Sharpe of New I is more than Sharpe current times correlation, current and new i. Maybe is easier to remember in that way.

#3

Is you question a multiple choice question? Are you asking to choose one? Because the first two are relevant in calculating portfolio risk. The third one is also relevant in comparing a new investment to existing portfolio, but it is not used in calculating the portfolio risk. Remember the formula for portfolio risk?

#4

It is a multiple choice question in which you have a table and 3 asset amongst which you have to choose one. You re give the std dev, correlation, sharpe ratio of each asset class.

The question asked for the effect on the risk and the answer mentioned that they are all suitable since correlation < 1.00

Any thoughts?

#5

Answer: 2)

New asset class contributes to diversification effects on overall risk of portfolio via [low] correlation

#6

Sharpe Ratio of New Investment SHOULD BE GREATER THAN Sharpe Ratio of existing Portfolio * Correlation of New Asset with Current Portfolio.

Only then your new asset will work to improve the Sharpe Ratio overall, after addition.

So the right answer is that NONE of the 3 choices by themselves provided by the OP is enough.