Problem 1

A firm that might exhibit low correlations of returns with the overall stock market would be utilities companies. Utility companies provide stable earnings to investors, and these types of stocks have a low sensitivity meaning that the stocks are not affected much because of changes in the stock market. A low sensitivity stock is preferred by investors since these types of stocks have stability and are less risky than stocks with a high sensitivity. A low sensitivity stock is not always a good thing because the chances of these stocks providing a high return are low since the market does not have much effect on these stocks.

The reason why correlations of utility companies are expected to be low is because these stocks are considered defensive assets. These types of stocks have a lower investment risk and provide a stable return, these types of stocks move away from the market which offers diversification in a portfolio. This type of stock is a good investment because no matter how the market is currently doing now these stocks provide earnings even if the market is doing badly. Even during a recession these types of stocks perform better than any other investments.

Diversification is important when it comes to investing since this type of strategy can protect against losses. When an investor spreads their investment their chances of one of their investments doing well increase even if other investments are not doing good. Investing in a firm with a low correlation of return is a good step in providing diversification to a portfolio.

What are other strategies that could be taken? Are they better options? Why?

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Problem 2

Healthcare is often viewed as a defensive sector, which is where pharmaceutical companies operate. Defensive sector funds are mutual funds or exchange-traded funds (ETFs) that invest in companies in recession-proof industries. The healthcare industry, which includes hospitals, drug manufacturers, and medical device manufacturers, benefits from a steady consumer demand, regardless of the state of the economy. People need medical treatments and medications, regardless of their economic circumstances, so healthcare, and pharmaceuticals, are one such sector.

Unlike cyclical sectors, non-cyclical sectors like health care tend to produce stable profits through all phases of the economic cycle. For the maintenance of health and the treatment of illnesses, pharmaceutical products are essential. The demand for medications will continue, so pharmaceutical companies' revenues will be less affected by economic contractions. Non-cyclical securities are generally profitable regardless of economic trends because they produce or distribute goods and services we always need, including things like food, power, water, and gas.

In addition, we need to combine all the assets that have low correlation, so consumer durable companies tend to exhibit a lower correlation because they have continuous cash flows. Since they are considered defensive assets, they have a lower degree of correlation with the market. In other words, they will not move in line with the market, so they will attempt to move in a different direction. There may be stability and insulation provided by pharmaceutical stocks when market conditions are turbulent. By adding a low, or negatively correlated, mutual fund to an existing portfolio, diversification benefits are gained.

What are other strategies that could be taken? Are they better options? Why?