Sign up  |  Log in

Return vs Correlation and Beta

Why does return can be derived from historical data while past correlation coefficients and betas are considered to be unreliable?

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

Betas and correlations of returns change over time.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

Neither returns nor correlations can be predicted with their historical estimates. Adjustments have to be made because everything changes with time and is sensitive to interest rates, the state of economy, political climate among other things… In particular, there is the whole theory of factor models telling us how to estimate expected future returns from the past returns. The models are actively used on the asset management side. For more details, see 

Grinold, R. C., & Kahn, R. N. (1999). Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk.