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    Recommending Suitable Funds.

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    Read problem below. I picked Fund D, as diversification and the reduction of risk require the assets' returns not be highly positively correlated. Please let me know what you think.

    Your investment research department is currently recommending any of the following securities for purchase by firm clients, assuming each is suitable for client objectives:

    Investment Current FMV Current Yield Correlation Coefficient

    Fund A $32.875 1.25% 0.95
    Fund B $25.500 3.22% 0.89
    Fund C $12.625 5.63% 0.78
    Fund D $18.375 2.10% -0.26

    From the perspective of risk reduction, which fund would you be inclined to recommend?

    Fund A, because it has the highest price per share and its correlation coefficient would raise the correlation coefficient of portfolio.
    Fund B, because it pays a reasonable current return and is closest to the correlation coefficient of portfolio.
    Fund C, because it is the least costly and the highest yielding, which reduces risk
    Fund D, because it would be expected to reduce the portfolio's overall correlation coefficient with the market

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    Solution Preview

    Below is your tutorial.
    In analyzing the four funds, I assumed that the correlation coefficient is the Fund's correlation coefficient as regards the market rather than the portfolio.

    FUND A - this fund has the lowest current yield but the highest correlation coefficient. We know already that to be able to reduce the overall risk of the ...

    Solution Summary

    The expert examines recommending suitable funds. Diversification and the reduction of risks require the assets' returns not be highly positively correlated is determined.