You are thinking about creating a new portfolio that is a combination of $2$ or more asset classes. You want the portfolio you create to have the highest possible Sharpe ratio. To accomplish this your friend tells you that you should create the new portfolio using only the $1$ or $2$ asset classes with the highest stand$-$alone Sharpe ratios. Your friend feels this would be a good approach because in lecture we learned that everyone$$both the risk tolerant and risk averse$$prefer portfolios with higher Sharpe ratios. So it stands to reason that the new portfolio would achieve the highest Sharpe ratio if it was created using only the underlying asset classes with the highest individual Sharpe ratios. Is this logic correct? Pick the statement below that is most correct.

You are thinking about creating a new portfolio that is a combination of $2$ or more asset classes. You want the portfolio you create to have the highest possible Sharpe ratio. To accomplish this your friend tells you that you should create the new portfolio using only the $1$ or $2$ asset classes with the highest stand$-$alone Sharpe ratios. Your friend feels this would be a good approach because in lecture we learned that everyone$$both the risk tolerant and risk averse$$prefer portfolios with higher Sharpe ratios. So it stands to reason that the new portfolio would achieve the highest Sharpe ratio if it was created using only the underlying asset classes with the highest individual Sharpe ratios. Is this logic correct? Pick the statement below that is most correct.

Yes $-$ this logic is correct. Building a new portfolio using assets that have the highest stand alone Sharpe ratios is the way to create a new portfolio with the highest Sharpe ratio.

No $-$ this logic is wrong. You should only use the one asset class with the highest stand alone Sharpe ratio to create the new portfolio if your objective is to create the portfolio with the highest Sharpe ratio.

No $-$ this logic is incomplete. When you combine risky assets together in a portfolio the correlation between the assets also matters. Sometimes, depending on the correlation, it is possible to combine assets with lower stand alone Sharpe ratios together with other assets to create a new portfolio with a higher Sharpe ratio than you could create by focusing only on the assets with the highest stand alone Sharpe ratios.