I can't help but notice that 0.70 or 0.80 is still lower than the guaranteed 1.00 you would have gotten from NOT diversifying away from the S&P 500.
Also, junk bonds have a high correlation to the value premium, i.e., distress risk.
Ken French of Fama/French Forum and Professor at Tuck School of Business at Dartmouth has different point of view about asset class correlations going up in bad markets.
Watch his video interview on this exact topic at http://www.dimensional.com/famafrench/2009/07/did-
diversification-fail-when-we-needed-it-most.html
An alternative explanation is that correlations haven't changed as such, instead we just saw some severe left tails which are hard to distinguish from higher correlations.
Ken French also posted a recent video on this in which he talked about the higher correlations being due to market risk becoming more prominent relative to asset specific risk.
Commenting by HaloScan
