So problem states a 50/50 portfolio and shows some statistics of return, risk, SR… and then has a chart of REITS and Direct Real Estate Investments (represented by unsmoothed NCREIF Index) and their correlation with equity and FI. It then says a guy wants to shift the investment to 50% equity, 40% FI and 10% direct real estate… Thereby swapping 10% of the FI for 10% into direct real estate.

The problem asks to explain the diversification, returns, risk, etc and if its a good decision.

As part of the answer in response to diversification, it says: ‘Diversification: The correlation between the Bloomberg Barclays Aggregate and the unsmoothed NCREIF Index is significantly negative, which would indicate good potential for diversification.’

Shouldn’t the diverisification be comparing adding NCREIF at 10% with equity at 50% since we are swapping out the FI for the NCREIF? Why would they compare the diversification to FI when that’s what is being swapped out. 

On the AM test, if I compared the correlation to equity instead of FI, would that get marked incorrect?