Question

There is diversification benefit only if two assets’ correlation coefficient is less than 0. In other words, there is no diversification benefit if two assets’ correlation coefficient is greater than 0.

True

False

Answer 1

False.

Diversification benefits arise when two assets which are not perfectly correlated with each other are added together. When two assets are perfectly correlated their is no diversification benefits. so, THE CORRELATION BETWEEN THE ASSETS SHOULD NOT BE A PERFECT 1, ANY CORRELATION BETWEEN THE ASSET LESS THAN 1, CREATED THE BENEFITS OF DIVERSIFICATION.

If the securities are not perfectly correlated to will react differently in different situations and hence reduce the overall risk of the portfolio. A diversification benefit exists when a portfolio's standard deviation can be reduced without reducing expected return.