The diversification benefits are greater if the correlation between the returns of the assets in the portfolio is lower. If the correlation equals +1, the minimum variance frontier is a straight line and there is no benefit to diversification (ρ3). If the correlation equals = -1, the minimum variance frontier is two line segments (ρ1). Therefore ρ2 must be less than 0.2 and greater than –1.0. It could be equal to zero, but we can’t tell for sure given the information in the problem.
