Efficient Portfolio the Weighted Average Thesis

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The first criterion is that the fund needs to maintain or enhance the expected return, which is currently 13.8%. The first criteria, therefore, rules out Fund B. The other three funds, however, are still contenders at this point.

The second criterion is that the fund should reduce volatility. There are two elements to portfolio volatility. The first is the volatility of the fund and the second is the correlation with the current portfolio. The lowest volatility, as measured by standard deviation, of the three remaining funds is with Fund D. This fund is also the only one of the three remaining funds to have a standard deviation lower than the current portfolio.

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However, that does not immediately rule out the other funds. It is also recommended to consider the correlation with the current portfolio. The less correlated the new fund is with the current portfolio, the more the new fund will reduce overall portfolio volatility. Fund D. is also the fund with the lowest correlation to the….....

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