Correlation Between Principal Capital and Equity Income

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

By analyzing existing cross correlation between Principal Capital Appreciation and Equity Income Fund, you can compare the effects of market volatilities on Principal Capital and Equity Income 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 Principal Capital with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Capital and Equity Income.

Diversification Opportunities for Principal Capital and Equity Income

0.93

Correlation Coefficient

Principal Capital  Equity Income

Almost no diversification

The 3 months correlation between Principal and Equity is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Principal Capital Appreciation and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Principal Capital 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 Principal Capital Appreciation are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Principal Capital i.e., Principal Capital and Equity Income go up and down completely randomly.

Pair Corralation between Principal Capital and Equity Income

Assuming the 90 days horizon Principal Capital Appreciation is expected to generate 1.13 times more return on investment than Equity Income. However, Principal Capital is 1.13 times more volatile than Equity Income Fund. It trades about 0.2 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.14 per unit of risk. If you would invest  7,890  in Principal Capital Appreciation on September 12, 2024 and sell it today you would earn a total of  704.00  from holding Principal Capital Appreciation or generate 8.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Principal Capital Appreciation  vs.  Equity Income Fund

Principal Capital

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Capital Appreciation are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Principal Capital may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Equity Income

Risk-Adjusted Performance

10 of 100

OK

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

Pair Trading with Principal Capital and Equity Income

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

The idea behind Principal Capital Appreciation and Equity Income 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.

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 Transaction History module to view history of all your transactions and understand their impact on performance.