evaluating new asset before adding to the portfolio

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yasser almansoor

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hi everybody, with that u do well in your studying
book 4 page 363 they provide us the formulla of how we evalauting the diversification benefit of new asset beofre adding it to the portfolio
and the formulla states the the E(Rnew)=RF+ (standard deviation of new asset) * correlation of the new asset and portfolio) divided by stanard deviation of the portfolio * ( E(Rp)-RF).
my question if why we should use only the standard deviation of the new asset to determine the covaraince in the numerator??
Thank You
 
Remember that this term:
(standard deviation of new asset) * correlation of the new asset and portfolio) divided by standard deviation of the portfolio
is the beta of that new asset. Recall the definition of beta:
beta=cov_im/var_m= corr_im *std_i* std_m/std_m^2
cancelling yields:
beta=corr_im * std_i/std_m
 
If let me know, which part is not clear, I can try to explain it more clearly.
 
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