Statistics for investing. A mutual-funds companys newsletter says, Awell-diversified
Chapter 0, Problem 4.32(choose chapter or problem)
Statistics for investing. A mutual-funds companys newsletter says, Awell-diversified portfolio includes assets with low correlations. The newsletterincludes a table of correlations between the returns on various classes ofinvestments. For example, the correlation between municipal bonds and large-cap stocks is 0.50, and the correlation between municipal bonds andsmall-cap stocks is 0.21.(a) Rachel invests heavily in municipal bonds. She wants to diversify by addingan investment whose returns do not closely follow the returns on her bonds.Should she choose large-cap stocks or small-cap stocks for this purpose? Explainyour answer.(b) If Rachel wants an investment that tends to increase when the return on herbonds drops, what kind of correlation should she look for?
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