Chris asked:
A mutual fund company’s newsletter says A well divresified portfolio inculdes assets with low corrleations. the newsletter includes a table of correlations between the annual returns on various classes of investments.For example, the correlation between municipal bonds and large cap stocks is .5 and the correlation betwween municiapl bonds and small cap stocks is .21
If rachel invests heavily in municipal bonds, she wants to diversify by adding an investement who returns do not closely follow he returns on ther bonds. should she choose large cap or small cap stocks for this purpose? and If she wants an investments that tends to increase when the return on her bond drops, what kind of correlation should she look for?
