Assume that I currently have $500,000 in my 401(k) plan. Assume that I have all of my money invested in the Fidelity Magellan mutual fund. My financial advisor has recommended that I diversify my holdings. My advisor has recommended that I keep $250,000 in Magellan and put $250, 000 into one of the following funds: Fidelity Low-Priced Stock or Fidelity Select Health Care.

My financial advisor provided the following information:

Standard Deviation Expected

Of Returns Returns

Fidelity Low-Priced Stock 9.5% 18%

Fidelity Select Health Care 9% 16%

Fidelity Magellan 8% 12%

the correlation coefficient (rho) between Magellan and Low-Priced Stock is 0 (zero)

the correlation coefficient (rho) between Magellan and Select Health Care is .20

I think that I should just keep all of my money in Magellan because that fund has the lowest risk. What do you think?

1. I should keep all $500,000 in Magellan
2. I should invest $250,000 in Magellan and $250,000 in Low-Priced
3. I should invest $250,000 in Magellan and $250,000 in Select Health Care Low-Priced