Correlation Between Intermediate Government and Short Term

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

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

Diversification Opportunities for Intermediate Government and Short Term

0.84

Correlation Coefficient

Intermediate Government  Short Term

Very poor diversification

The 3 months correlation between Intermediate and Short is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Government Bond and Short Term Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Income and Intermediate Government 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 Intermediate Government Bond are associated (or correlated) with Short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Income has no effect on the direction of Intermediate Government i.e., Intermediate Government and Short Term go up and down completely randomly.

Pair Corralation between Intermediate Government and Short Term

Assuming the 90 days horizon Intermediate Government Bond is expected to under-perform the Short Term. But the mutual fund apears to be less risky and, when comparing its historical volatility, Intermediate Government Bond is 1.05 times less risky than Short Term. The mutual fund trades about -0.25 of its potential returns per unit of risk. The Short Term Income Fund is currently generating about -0.24 of returns per unit of risk over similar time horizon. If you would invest  1,203  in Short Term Income Fund on October 11, 2024 and sell it today you would lose (5.00) from holding Short Term Income Fund or give up 0.42% of portfolio value over 90 days.

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

Intermediate Government Bond  vs.  Short Term Income Fund

Intermediate Government

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Government Bond are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Intermediate Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Term Income

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Intermediate Government and Short Term

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

The idea behind Intermediate Government Bond and Short Term 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.

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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.