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Question 12 of 13 A mutual funds company's newsletter says, "A well-diversified portfolio includes assets with low correlations." The newsletter includes a table of correlations between the returns on various classes of investments. For example, the correlation between municipal bonds and large-cap stocks is 0.50, and the correlation between municipal bonds and small-cap stocks is 0.21. (a) Rachel invests heavily in municipal bonds. She wants to diversify by adding an 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? O Small-cap stocks; since the correlation 0.21, which is close to zero-indicates that the performances of small-cap stocks and municipal bonds do not track each other. O Large-cap stocks; since any correlation that is less than 1 indicates that the performances are unrelated; i.e. the returns on large-cap stocks and municipal bonds do not track each other. O Large-cap stocks; since the correlation of 0.50 indicates that - of the time large-cap stocks track the performance of municipal bonds and - of the time they do not. O Small-cap stocks; since the correlation 0.21 indicates that 21% of the time small-cap stocks track the performance of municipal bonds and the remaining time they do not.Each given statement contains a blunder. In each case, choose the statement that correctly explains the blunder. "There is a high correlation between "We found a high correlation "The correlation between height and the sex of American workers and their (r = 1.09) between students' ratings of weight of the subjects was r = 0.63 income." faculty teaching and ratings made by centimeters." other faculty members." Answer Bank Correlation can only measure a relationship between variables with the same units. The correlation must give the units of measure. The correlation has no unit of measurement; it is just a number. The correlation must be a number between -1 and 1. Correlation requires both varibles to be quantitative. The correlation must state which variable is the explanatory variable and which variable is the response variable.(b) If Rachel wants an investment that tends to increase when the return on her bonds drops, what kind of correlation should she look for? O a negative correlation O a positive correlation a correlation close to 0 O a correlation close to 1 Question Source: Moor The Basic Pr