You currently have all of your money invested in Prestige Worldwide, which has an expected return of 25% and a volatility of 70%. Suppose the risk-free interest rate is 5%. There is another asset, Boats and O’s, which you are considering adding to your portfolio. Boats and O’s has an expected return of 10% with a volatility of 25%. The correlation between the two is given by 0.3.
(a) Find the Sharpe ratio of Prestige Worldwide.
(b) Determine whether you should add Boats and O’s to your portfolio.
(c) Suppose you invest 15% of your money in Boats and O’s. Compute the correlation of Boats and O’s with your new portfolio.
(d) Should you invest more money into Boats and O’s?