A mutual fund representative is constructing a portfolio for a client who desires to reduce overall portfolio volatility. The client's existing portfolio is heavily invested in Canadian equity mutual funds. To best achieve diversification and reduce volatility, the representative should recommend adding funds that exhibit which characteristic relative to the existing Canadian equities?

Question: A mutual fund representative is constructing a portfolio for a client who desires to reduce overall portfolio volatility. The client's existing portfolio is heavily invested in Canadian equity mutual funds. To best achieve diversification and reduce volatility, the representative should recommend adding funds that exhibit which characteristic relative to the existing Canadian equities?

Answer options:

• High positive correlation.
• High beta. ✅ Low or negative correlation.
• High alpha.

Correct answer: Low or negative correlation.

Explanation: To reduce overall portfolio volatility, the representative should add assets that have a low or negative correlation with the client's existing Canadian equities. This means when Canadian equities perform poorly, these new assets may perform well, or at least not move in the same direction, thereby smoothing out portfolio returns.