Chris asked:
A mutual fund company’s newsletter says A well divresified portfolio inculdes assets with low corrleations. the newsletter consists of a table of correlations between the annual returns on numerous classes of investments.For example, the correlation between municipal bonds and large cap stocks is .five 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 select large cap or small cap stocks for this purpose? and If she wants an investments that tends to improve when the return on her bond drops, what type of correlation should she appear for?
