Sharpe (Ratio) Thinking about the Investment Opportunity Set and CAPM Relationship

Figure 1

Maximum Sharpe ratio of two risky assets versus their correlation coefficient. In this example 𝑆(𝑥₁)=0.4, 𝑆(𝑥₂)=0.25, and we vary the correlation coefficient 𝜌₁₂ in [−0.95,0.95].