This Discussion Board builds on applying two key concepts of diversification: correlation of asset returns and risk reduction. In Chapter 11 last week we developed the analysis of correlations of returns from different stocks with the conclusion that the lower the correlation among the stock returns in the portfolio, the greater the risk reduction in the portfolio. In Chapter 12 this week we developed the concept of beta or the sensitivity of a stocks return to a change in the markets return. For the homework problems this week you were asked in problem 5 to calculate the beta of two actual stocks, Ford and U.S. Steel, and interpret the results. (Specific chapter sections that you may want to review are Chapter 11, Section 11.4 Risk and Diversification and Chapter 12, Section 12.2 What Can You Learn From Beta?)

This Discussion Board focuses on examining five mutual funds or exchange-traded funds (which are like mutual funds but trade intraday) in the context of beta, correlations, diversification and performance return over the last five years. To answer the four questions below, please read the attached article, Diversifications Role as a Risk-Reduction Tool, and the attached spreadsheet, Correlation Analysis and Performance Metrics, which provides statistics on the two funds mentioned in the article as well as a fund that simply buys gold, a domestic stock index fund that tracks the S&P 500, and a global stock mutual fund that tracks an index of global securities.

Please answer the following four questions and post your comments to two other respondents on Discussion Board 3 in Blackboard:

1. Long-term Treasury Bonds with a 10-year maturity are currently yielding about 0.70%, the lowest yields in many decades. Stocks on average have an annual return of around 10%. Why would anyone add long-term Treasury bonds to a stock portfolio?
2. Why does the Eaton Vance Richard Bernstein All Asset Strategy Fund (EARAX) have the lowest standard deviation among the funds?
3. If you were building your own portfolio, would you use gold as a diversifier? Explain your answer.
4. If you were given $1,000,000 to buy into any combination of the 5 funds in the spreadsheet, which allocation would you choose, based on your risk/return preferences? Calculate your weighted average portfolio return and portfolio beta based on the historical 5-year annualized returns.