Investment Question

[Admiral Yi]

Looked for The Gypsy's old thread, couldn't find.

So I was noodling around the E*Trade website and came across their portfolio analyzer.  One thing they do is tell you the diversification among asset types.  Domestic stocks vs. bonds vs. foreign stocks I get.  What I don't understand is large cap stocks vs. small caps.  Can anyone explain this to me?

Another bonus question, free of charge.  Bank CDs are FDIC insured.  Why do they yield more than Treasury bonds of the same maturity?

[alfred russel]

Looked for The Gypsy's old thread, couldn't find.

So I was noodling around the E*Trade website and came across their portfolio analyzer.  One thing they do is tell you the diversification among asset types.  Domestic stocks vs. bonds vs. foreign stocks I get.  What I don't understand is large cap stocks vs. small caps.  Can anyone explain this to me?

Another bonus question, free of charge.  Bank CDs are FDIC insured.  Why do they yield more than Treasury bonds of the same maturity?

large cap vs. small: big companies vs. small.

A few reasons: 1) the insurance of CDs is capped, 2) CDs are relatively illiquid, 3) Treasury interest is shielded from state income taxes, CD interest is not.

[Admiral Yi]

large cap vs. small: big companies vs. small.

A few reasons: 1) the insurance of CDs is capped, 2) CDs are relatively illiquid, 3) Treasury interest is shielded from state income taxes, CD interest is not.

Right, forgot about the tax treatment.

Re small caps, my question was why is that important for diversification?  Is there evidence that small caps as a class have a low corelation to large caps?

[ulmont]

Re small caps, my question was why is that important for diversification?  Is there evidence that small caps as a class have a low corelation to large caps?

Small caps are heavily correlated with large caps, but have more volatility.
http://www.resourceconsulting.com/PDFs/Part%205%20Small%20Cap%20Stocks%2010-00%202.pdf