Very poor diversification
Overlapping area represents the amount of risk that can be diversified away by holding MerVal and Taiwan Wtd in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Wtd and MerVal is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on MerVal are associated (or correlated) with Taiwan Wtd. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Wtd has no effect on the direction of MerVal i.e. MerVal and Taiwan Wtd go up and down completely randomly.