Suppose your investment portfolio is comprised of the Russell 1000 Index ETF—thi

Question

Suppose your investment portfolio is comprised of the Russell 1000 Index ETF—this index

represents the 1000 largest publicly traded firms in the U.S.—with ticker IWF. You are thinking of

buying one (and only one) of the following assets: stock of Tesla (ticker TSLA), stock of Best Buy

(BBY), or a Treasury Bonds ETF (IEF). Your new portfolio will be comprised of 90% IWF with

the rest in the asset you buy.

Below are average returns, standard deviations, and correlations based on monthly returns for the

past five years. Would you buy one of the three assets? If so, which asset would you buy? Explain

Expected Return Standard Deviation Correlations IWF TSLA BBY IEF 1 .375% 1.692% 1.988% 0.206% 3.004% 12.170% 9.352% 1.458% 1.00 0.27 1.00 0.25 0.03 1.00 -0.18 -0.03-0.31 1.00

Explanation / Answer

Portfolio with 90% IWF & rest 10% in other asset Return Std Dev Correlations with IWF Return Std Dev Sharpe Ratio IWF 1.375% 3.0040% 1.00 1.37500% 3.0040%                                   0.4577 TSLA 1.692% 12.1700% 0.27 1.40670% 3.2507%                                   0.4327 BBY 1.988% 9.3520% 0.25 1.43630% 3.0738%                                   0.4673 IEF 0.206% 1.4580% -0.18 1.25810% 2.6812%                                   0.4692 Since Sharpe Ratio is highest for buying IEF, we should opt for it

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