Asset Allocation : Mock Kohler Q3

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Blackou

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Hi,
The question asks to identfy which asset class can be criticized in the following asset class specifications :
1) LargeCap
2) Mid Cap
3) Small Cap
4) Agricultural Commodity Index
5) All Commodity Index
6) Taxable Municipal bonds.
The answer proposed are Mid Cap , All commodity Index or Taxable Municipal bonds.
I choose the All commodity index because it seems not mutually exclusive with the Agricultural Commodity Index.
However the correct answer was “Roth would most likely criticize the specification of mid-cap equities because they are not mutually exclusive with respect to domestic large-cap and small-cap equities”
This really confuse me, are not the ”All commodity Index” vs “Agricultural Commodity Index” less mutually exclusive compare to “Mid Cap” vs “Large Cap & Small Cap” ?
The correlations are given and are higher between Mid Cap & Small & Large Cap compare to All Commodity Index-Agricultural Commodity Index : does it explain entirely the correct answer?
Thanks for any advice
 
If i recall this question correctly, Asset classes should not be correlated, otherwise it would defeat the purpose of diversification. Also, all assets within an asset class should be homogoneous (commodities are commodities and bonds are bonds thus these two separate asset classes are appropriate). Their correlations are also less than positively correlated (at least a lot less than mid-cap equities w/ large cap equities while the commodities are .5). Therefore the only logical choice would be mid-cap equities it has a .97 correlation with large cap equities. It can also be argued that large cap equities are already inclusive of mid cap equities and thus are not mutually exclusive (but the correlation dominates here).
 
OK thanks for the two of you,
I missed that other thread
 
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