When Should an Asset Class Be Included in a Portfolio?

Assets should be considered for portfolio addition if their inclusion would improve the portfolio’s mean-variance efficient frontier. This occurs when the asset class’s Sharpe ratio is higher than the product of the existing portfolio’s Sharpe ratio and the correlation between the asset class return and the portfolio return.

For example, a manager may be considering whether to add an asset class with a Sharpe ratio of 0.18 to a portfolio with a Sharpe ratio of 0.20. The correlation between the asset class and the portfolio is 0.5. Since 0.18 > 0.20 * 0.5 = 0.10, the asset class should be added.

For more information, see all articles on: Asset Allocation, FInancial Planning, Investment Returns, Portfolio Management

See also:
  • What Makes an Asset Class?
  • Portfolio Rebalancing: Setting Optimal Asset Class Target Corridors
  • Mean-Variance Optimizers in Asset Allocation
  • Asset Allocation Optimization Using Resampled Efficient Frontiers
  • Macro Performance Attribution
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

    Leave a Reply

    You must be logged in to post a comment.