A portfolio manager is currently invested 100% in the US stock market. His expected return on the US market is 12% with a volatility of 14%. The portfolio manager considers adding Hong Kong stocks into his portfolio mix, and he estimates its expected return to be 8% (in US dollar term) with a volatility of 20%. The risk-free rate (in US dollars) is 2% in the US and Hong Kong. The correlation between two markets is 0.50. Should the portfolio manager add some Hong Kong stocks into his portfolio mix, or short sell some Hong Kong stocks? Show your calculations.

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Given Expected return on US market 12 Volatility of us market 14 2 Expected re... View the full answer