You are currently invested in the Farrallon Fund, a broad-based fund of stocks a

Question

You are currently invested in the Farrallon Fund, a broad-based fund of stocks and
other securities with an expected return of 12% and a volatility of 25%. Currently, the
risk-free rate of interest is 4%. Your broker suggests that you add a venture capital
fund to your current portfolio. The venture capital fund has an expected return of 20%, a volatility of 80%, and a correlation of 0.2 with the Farrallon Fund. Calculate
the required return and use it to decide whether you should add the venture capital
fund to your portfolio.

Explanation / Answer

Farrallon fund return per risk
= (expected return - risk free rate)/volatility
= (12%-4%)/25% = 32%

for the same amount of return per volatility, return of venture capital should be
4% + 32%*80% = 29.6%

But the actual returns are 20%

venture capital return per risk
= (expected return - risk free rate)/volatility
= (20%-4%)/80%
= 20%

since the return/risk of the venture capital is less than the fund and the correlation coefficient of returns is >0, it does not make a good addition.

Please rate my answer!
thanks in advance :)

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