We can use the Sharpe Ratio to determine if adding an asset creates a better (higher) minimum variance frontier.

The Sharpe ratio is calculated using the following formula:

Sharpe Ratio = (E(R

_{asset}) – R_{F})/σ_{asset}Calculate the Sharpe ratio for the current portfolio and then calculate the Sharpe ratio after adding the new asset.

If the Sharpe Ratio

_{new port}> (Sharpe Ratio_{current port}* ρ_{(new asset, current port)}), then the new asset should be added.ρ_{(new asset, current port)} = correlation coefficient between the current portfolio’s returns and the new asset’s returns

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