Suppose if I want to choose a domain name containing two words say - one and two. When it comes to Search Engine Optimization which of the following is the better way of naming the domain?
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This is a VERY VERY small aspect you're looking at for SEO. There are many more things you can spend your time on as this does not generally have that much of an impact on SEO. Look at either Moz or Search Metrics' ranking factors to see how far down this is in importance. Technically length of URL is on here but not whether separating words is highly correlated with SEO benefits.
With domain names, you want to just be sure it makes sense for your visitors and brand.
arnoldschwarzenegger.com is probably not going to do well with people typing in on their phones as the-terminator.com.
I would prefer the domain that looks the coolest, is the most expensive to acquire and is the most official looking domain just about every time. That's usually going to be two.com/one for me. Hyphens in domains have fallen out of style many years ago. It's also very hard for users to press the hyphen button on their phones which makes accessing your site more difficult.