Assuming that time period used to calculate the beta and correlation between an index and an asset is the same, is it possible to observe low beta while having high correlation?

If yes, how would you explain it?


Yes, it's possible if one instrument has higher volatility that the other. Consider a low volatility series that is slightly lagged. For example, take a large sine wave and duplicate with tiny lag.

In practice it may be hard to find a well-correlated asset - perhaps alternatively consider a very high freq sine of a lower freq sine function (oscillating oscillations) versus the lower freq sine.

From these formula: Corr(1,2) = Cov(1,2)/(Var(1).Var(2))^1/2 and Beta = Cov(1,2)/Var(1)

Therefore Beta = Corr(1,2) * 1/Var(1) * [Var(1) * Var(2)]^0.5 = Corr(1,2) * [Var(2) / Var(1)]^0.5

A good reference may be: Do two stocks with the same beta have a correlation of 1?

  • $\begingroup$ Given that the same time period and time-step used in analysis, isn't it counterintuitive to think that if asset 1 with high vol and asset 2 with low vol will have high correlation? $\endgroup$
    – AK88
    Oct 28 '16 at 8:28
  • $\begingroup$ Depends on their covariance $\endgroup$
    – rrg
    Oct 28 '16 at 9:06
  • $\begingroup$ It seems like a never ending circular refenrece :)) $\endgroup$
    – AK88
    Oct 28 '16 at 9:20

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