Two stocks that have the same beta ____ have the same correlation because _______:
A)may; because correlation measures the sensitivity of the S&P to the market portfolio.
B)will; because correlation measures the tightness of fit around the regression line.
C)may not; because correlation measures the tightness of fit around the regression line.
D)may not; because correlation measures the sensitivity to change.
E)None of the above.

Question

Quizplus · Accepted Answer

Beta measures the sensitivity of a stock to market fluctuations whereas correlation measures the degree of linear relationship between two variables. Therefore, two stocks with the same beta may have different correlations as correlation is not solely dependent on beta but also on other factors such as stock-specific risks and diversification benefits. Hence, the statement "Two stocks that have the same beta may not have the same correlation" is true. Option C states this correctly.

Two Stocks That Have the Same Beta ____ Have the Same