Understanding Closed-End Funds

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Advanced Topics

2: The Power of Correlation

A well-diversified, risk-efficient closed-end fund portfolio likely contains a variety of funds, each responding to market changes in different ways. That's where correlation comes in. Correlation is a measurement of how those investments react relative to each other in different circumstances. In other words, in a given market condition, does investment #1 always increase when investment #2 increases? And correlation can be a powerful tool – one that helps you to combine investments with clarity and confidence to help you achieve your financial goals.

With a concise picture of various securities' or assets' historical correlations, your financial advisor can help you combine investments that have had low or negative correlation with each other to achieve intelligent diversification -- to ideally reduce portfolio volatility and enhance your return potential. It is important to note that diversification does not assure a profit or ensure against loss.

Next: Constructing CEF Portfolios

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