Correlation Between Value Fund and Select Fund

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

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

Diversification Opportunities for Value Fund and Select Fund

0.86

Correlation Coefficient

Value Fund  Select Fund

Very poor diversification

The 3 months correlation between Value and Select is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund I and Select Fund R in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Fund R and Value Fund 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 Value Fund I are associated (or correlated) with Select Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Fund R has no effect on the direction of Value Fund i.e., Value Fund and Select Fund go up and down completely randomly.

Pair Corralation between Value Fund and Select Fund

Assuming the 90 days horizon Value Fund is expected to generate 1.86 times less return on investment than Select Fund. But when comparing it to its historical volatility, Value Fund I is 1.61 times less risky than Select Fund. It trades about 0.13 of its potential returns per unit of risk. Select Fund R is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  10,600  in Select Fund R on September 3, 2024 and sell it today you would earn a total of  1,008  from holding Select Fund R or generate 9.51% return on investment over 90 days.

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

Value Fund I  vs.  Select Fund R

Value Fund I

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Value Fund I are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Value Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Select Fund R

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with Value Fund and Select Fund

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

The idea behind Value Fund I and Select Fund R 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.