Answer :
An investor will receive diversification benefits (reduced volatility) from this portfolio as long as the correlation coefficient between asset A and asset B is less than 1.
Diversification allows the inclusion of uncorrelated instruments to offset the high volatility of riskier assets. Over the long term, a diversified investment portfolio will have lower overall volatility, but each asset class will generate its own optimal returns.
Diversification works best when assets are uncorrelated or negatively correlated with each other, so when part of the portfolio goes down, other parts go up.
Diversification is a method of spreading investment risk by mixing different assets in a portfolio. Negatively correlated asset classes can be used to provide some degree of diversification, while positively correlated asset classes cannot.
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