Correlation Between Equity Growth and Western Asset

Can any of the company-specific risk be diversified away by investing in both Equity Growth and Western Asset at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Equity Growth and Western Asset into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Equity Growth Fund and Western Asset Smash, you can compare the effects of market volatilities on Equity Growth and Western Asset and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Equity Growth with a short position of Western Asset. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Growth and Western Asset.

Diversification Opportunities for Equity Growth and Western Asset

0.85

Correlation Coefficient

Equity Growth  Western Asset

Very poor diversification

The 3 months correlation between Equity and Western is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Fund and Western Asset Smash in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Asset Smash and Equity Growth is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Equity Growth Fund are associated (or correlated) with Western Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Asset Smash has no effect on the direction of Equity Growth i.e., Equity Growth and Western Asset go up and down completely randomly.

Pair Corralation between Equity Growth and Western Asset

Assuming the 90 days horizon Equity Growth Fund is expected to generate 4.06 times more return on investment than Western Asset. However, Equity Growth is 4.06 times more volatile than Western Asset Smash. It trades about 0.21 of its potential returns per unit of risk. Western Asset Smash is currently generating about 0.07 per unit of risk. If you would invest  3,131  in Equity Growth Fund on August 31, 2024 and sell it today you would earn a total of  305.00  from holding Equity Growth Fund or generate 9.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Equity Growth Fund  vs.  Western Asset Smash

Equity Growth

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Growth Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Equity Growth may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Western Asset Smash

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Western Asset Smash are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Western Asset is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Growth and Western Asset

The main advantage of trading using opposite Equity Growth and Western Asset positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Growth position performs unexpectedly, Western Asset can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Western Asset will offset losses from the drop in Western Asset's long position.

The idea behind Equity Growth Fund and Western Asset Smash pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.