Final answer:
The statement that a portfolio with a correlation of exactly 1 is not diversified is true, as such correlation implies all assets move in the same direction at the same time, offering no risk reduction benefits.
Step-by-step explanation:
A statement that a portfolio of assets with a correlation of exactly 1 is not diversified is true. Diversification in finance is the process of allocating capital in a way that reduces exposure to any one particular asset or risk. The fundamental idea is to spread the risk over various types of investments (assets) that will yield the highest return within the acceptable risk level. This is achievable through investing in assets with low or negative correlations with each other, as it reduces the portfolio's overall risk.
When assets are perfectly correlated (with a correlation coefficient of 1), it means they move in the same direction at the same time. In such a case, when one asset experiences a downturn, the other assets in the portfolio will also move similarly, thus offering no risk reduction benefits. The absence of diversification benefits in a portfolio with perfectly correlated assets leads to a higher risk level since the portfolio would react uniformly to market events.
The correlation coefficient measures the degree to which two securities move in relation to each other. Correlation coefficients range from -1 to 1, where -1 indicates perfect negative correlation, 0 indicates no correlation, and 1 indicates perfect positive correlation. A diversified portfolio usually contains a mix of assets with varying degrees of correlation, often seeking to include assets with a negative or low positive correlation to balance the risk.