John and the Vanguard 500 Index mutual fund and want to diversify into an actively managed fund. They would like to invest in a fund that has about the same risk level as the vanguard fund, but that, when combined with the vanguard fund, will lower the total risk of the portfolio. Which one of the following funds should be selected?

1. Small-cap growth fund with a correlation with the Vanguard fund of .49.

2. Large-cap Foreign fund with a correlation with the Vanguard fund of .72.

3. Large-cap value find with a correlation with the Vanguard fund of .93.

4. Mid-Cap blend of find with a correlation with the Vanguard fund of .79.