Correlation Between Limited Duration and World Energy

Can any of the company-specific risk be diversified away by investing in both Limited Duration and World Energy 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 Limited Duration and World Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Limited Duration Fund and World Energy Fund, you can compare the effects of market volatilities on Limited Duration and World Energy 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 Limited Duration with a short position of World Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Limited Duration and World Energy.

Diversification Opportunities for Limited Duration and World Energy

-0.6

Correlation Coefficient

Limited Duration  World Energy

Excellent diversification

The 3 months correlation between Limited and World is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Limited Duration Fund and World Energy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on World Energy and Limited Duration 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 Limited Duration Fund are associated (or correlated) with World Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of World Energy has no effect on the direction of Limited Duration i.e., Limited Duration and World Energy go up and down completely randomly.

Pair Corralation between Limited Duration and World Energy

Assuming the 90 days horizon Limited Duration is expected to generate 1.23 times less return on investment than World Energy. But when comparing it to its historical volatility, Limited Duration Fund is 9.49 times less risky than World Energy. It trades about 0.13 of its potential returns per unit of risk. World Energy Fund is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,470  in World Energy Fund on September 16, 2024 and sell it today you would earn a total of  4.00  from holding World Energy Fund or generate 0.27% return on investment over 90 days.

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

Limited Duration Fund  vs.  World Energy Fund

Limited Duration

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Limited Duration Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Limited Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

World Energy

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in World Energy Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, World Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Limited Duration and World Energy

The main advantage of trading using opposite Limited Duration and World Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Limited Duration position performs unexpectedly, World Energy 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 World Energy will offset losses from the drop in World Energy's long position.

The idea behind Limited Duration Fund and World Energy Fund 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.

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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.