Describe the diversification potential of two assets with a -0.7 correlation. What is the potential if the correlation is +0.7?

Answer 1

The diversification potential is very good with two assets that have a -0.7 correlation. Since these two assets tend to move in opposite directions, the combination will greatly reduce the risk or volatility an investor would experience with only one of the assets. There is not much diversification potential for two assets with a correlation close to one, like +0.7.