Practice Quiz

Financial Planner

Category - Investment Planning

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If you are looking to add a new mutual fund for the purpose of diversification, the fund you would select would have what?
  1. Largest negative correlation
  2. Smallest negative correlation
  3. Zero variance
  4. Largest positive correlation
Explanation
Answer: A - When adding a new mutual fund for the purpose of diversification, select the fund with the largest negative correlation; this is the Rule 3 for appropriate fund selection. Rule 1: If the R² is 70 percent or more, select the fund with the highest Treynor or Jensen ratio. Rule 2: If the R² is less than 70 percent, select the fund with the highest Sharpe ratio.
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