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2016 PM MOCK Q21

Hey guys, i am wondering whether private equity could provide diversification effect to the protfolio as when i did the 2016 mock Q21, the question is below:

1. Private equity has low correlations with public equity, so it can greatly contribute to a portfolio’s ability to diversify risks.
2. The asset class’s low liquidity generally implies a smaller allocation.
3. Small pension funds should invest in a fund-of-funds structure to help increase diversification without increasing expenses

The question is asking which statement is most likely correct and the Ans is 2. But why 1 is wrong?

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private equity has relatively high positive correlations with public equity. the difference between the two is one is closed and lacks transparency while the other is open to everyone to scrutinize. the underlying businesses of the two still have similar risks, exposures and objectives especially towards the economy and markets of their products.

imagine if something like Apple is being run either as a private or a public company, the two would probably have different strategies but their risk exposures to the general economy or markets for tech products would mostly be the same.

o…i see!!

Thanks for your help!!

Where can I find the pm mocks? Thus far only did the official AMs.

Any directions would be greatly appreciated