If two assets with correlation coefficients of less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.

Question

Quizplus · Accepted Answer

A portfolio composed of two assets with correlation coefficients of less than one does take advantage of diversification benefits. The correlation coefficient measures the degree to which two assets move in the same direction. Therefore, a lower correlation coefficient indicates that the two assets do not move in the same direction all the time. By diversifying the portfolio with assets that have low correlation coefficients, the portfolio's overall risk can be reduced.

If Two Assets with Correlation Coefficients of Less Than One