Suppose we have two stocks, A and B, and let's plot them in the expected return volatility graph like this where the x-axis, right, represents the risk, the volatility, right, measured by the standard deviation. And the y-axis represents the expected return. Now, point A, right, represents the risk and return, the volatility and expected return combination that we would get if we invested 100% of our wealth in A. Now similarly, point B in this graph, right, represents the expected return and the volatility combination that we would get if we invested 100% of our wealth in asset B. Now what if we combine them into a portfolio? Right? Now let's start by assuming that A and B are perfectly correlated, right? With a correlation coefficient of positive 1. Right? Now what are the risk and return combinations that we can achieve from combining A and B into a portfolio? How do we obtain that? Well, we would obtain the possible combinations by varying the relative weights on A and B and then plotting the expected return and risk for each combination. And if we did that it would look something like this. Right? Now notice that, all though it might not look like it, we get a straight line, right? Why? Well this is because in this case and only in this case, there is no diversification benefit, right? Only in this case where the two assets are perfectly correlated, right? The expected return on the volatility happen to be the weighted average of the two individual values on the two assets. Okay, now what if A and B are less than perfectly correlated? Right? What if the correlation coefficient between A and B let's say is 0.2, right? It's still positive but close to 0, right? Now since A and B are not moving completely in tandem, right, combining them into a portfolio will reduce risk by diversification. Right? Again if we plot the expected return on this combinations that we would get from combining by changing the relative weights on A and B, they would look something like this. Okay, now notice that an equally weighted portfolio, suppose it's about here. Right? An equally weighted portfolio, an equally weighted in A and B on the orange line, right? On the orange combinations, has less risk than a similarly equally weighted portfolio on the blue line, right? And that's because, right, the orange line assumes that A and B are imperfectly correlated, right, and that helps diversify risk. Now what if A and B are perfectly negatively correlated? Right? Let's say that the correlation coefficient is -1, right? Now if you again, plug the risk and return combinations by varying the relative weights of A and B, this time you might get something like this. Right? In fact, right, in this case it is possible to find some combination of A and B. Where risk is, right, completely diversified away. This portfolio here has 0 risk. And again, this is because of the unique nature of the perfect negative correlation that we assume for A and B.