Suppose the SUPPER fund has an expected return of 13% and SD of 20%; BEAST fund has an expected
return of 5% and SD of 8%. The SUPPER and BEASST funds have a correlation coefficient of 0.35. Risk-free rate is 3%. Among all possible portfolios formed from the SUPPER and BEAST, what is the highest Sharpe ratio?
Solution: Diversification. Find the optimal portfolio weight of B (BEAST) is 0.3125 and that of SUPPER is 0.6875. As such, Expected return = 10.50%, SD = 14.81% and Sharpe ratio is 0.51.