Why is the correlation coefficient an important statistical measure for investors when they diversify their portfolio? Use an example to explain your answer.
In their “Pro’s Guide to Diversification”, the US investment firm Fidelity state that “to build a diversified portfolio, you should look for assets—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction, and to the same degree, and, ideally, assets whose returns typically move in opposite directions.” Explain the concept of diversification. Critically evaluate the above statement. What tools should you use to build a diversified portfolio?