Correlation Between Government Bond and Short Duration

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

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

Diversification Opportunities for Government Bond and Short Duration

0.94

Correlation Coefficient

Government Bond  Short Duration

Almost no diversification

The 3 months correlation between Government and Short is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Government Bond Fund and Short Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration and Government Bond 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 Government Bond Fund are associated (or correlated) with Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration has no effect on the direction of Government Bond i.e., Government Bond and Short Duration go up and down completely randomly.

Pair Corralation between Government Bond and Short Duration

Assuming the 90 days horizon Government Bond Fund is expected to generate 2.55 times more return on investment than Short Duration. However, Government Bond is 2.55 times more volatile than Short Duration Fund. It trades about 0.13 of its potential returns per unit of risk. Short Duration Fund is currently generating about 0.21 per unit of risk. If you would invest  908.00  in Government Bond Fund on December 27, 2024 and sell it today you would earn a total of  23.00  from holding Government Bond Fund or generate 2.53% return on investment over 90 days.

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

Government Bond Fund  vs.  Short Duration Fund

Government Bond

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Government Bond 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, Government Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Duration

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Short Duration Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Government Bond and Short Duration

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

The idea behind Government Bond Fund and Short Duration 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.