If the returns on two assets have a correlation coefficient of one, then there are no benefits of diversification by combining these assets in a two-asset portfolio.

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Quizplus · Accepted Answer

A correlation coefficient of one indicates perfect positive correlation between two assets, meaning they move in exact synchronization with each other. Therefore, combining them in a portfolio will not provide any diversification benefits as their returns will always move together, and the portfolio's risk and return profile will simply be the average of the two assets. Diversification is only beneficial when combining assets with less than perfect correlation, as this can reduce overall portfolio risk without sacrificing returns.

If the Returns on Two Assets Have a Correlation Coefficient