The paper assumes that naive investors in financial markets are ambiguity averse, and that they will obtain stochastic endowments (non-financial asset profits) at the end of the term and are currently ambiguous about the correlation coefficient between stochastic endowment and the payment of a risky asset. The effects of correlation ambiguity on asset pricing and aggregate social welfare are investigated. Our results demonstrate that correlation ambiguity might lead to limited participation and distortion of asset pricing. If the correlation coefficient is negative, and equity premium is positive, naive investors will obtain positive excess returns. If there is no correlation, or no equity premium, they cannot obtain excess return. And under other conditions they will obtain negative excess return. The regulators might implement policies, such as increasing the registration costs for sophisticated or strengthening disclosure requirements, to mitigate the ambiguity and improve participation. Further studies show that increasing registration costs will reduce the fraction of sophisticated investors and decrease the social welfare; whereas strengthening the disclosure requirements and market transparency can increase the aggregate social welfare.