Here’s my issue:
A mutual-funds company’s newsletter says, “A well-diversified portfolio includes assets with low correlations.” The newsletter includes a table of correlation among the returns on various classes of investments. For example, the correlation among municipal bonds and big-cap stocks is .50, and the correlation among municipal bonds and little-cap stocks is .21.
a.) Rachel invests heavily in municipal bonds. She want to diversity by adding an investment whose returns do not closely follow the returns on her bonds. Should she select big-cap stocks or little-cap stocks for this purpose? Explain your answer.
b.) If Rachel desires an investment that tends to improve when the return on her bonds drop, what kind of correlation should she appear for?
This isn’t a actual investing question, it’s just a issue in my homework that I have no idea how to figure out. Please assist me….
