Trying to understand why the answer to question 3 is not the ability to diversify portfolio risks. From the text book, page 37, the first sentence is that private equity has low correlations with publicly traded securities so I thought statement 1 is correct. Can anyone provide me with their perspective?
Yes PE does have a low correlation with other asset classes but since it is very illiquid, it is recommended to give it a maximum allocation of 5%. If you look at sentence 1., it says that because of low correlation it will “greatly” reduce portfolio risks. A 5% allocation will not have a huge impact on risk reduction. So, the first part of the sentence is correct but the second part isn’t.
PE is rather return enhancement vehicle when added to stocks/bonds portfolio, does not provide many diversification benefits as other AA classes such as RE for example.
PE is correlated to publicly traded equities, so it has low diversification benefits with publicly traded equities.
Thanks all of you for responding! Very helpful!