Correlation Between Defensive Market and Growth Equity

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

By analyzing existing cross correlation between Defensive Market Strategies and Growth Equity Investor, you can compare the effects of market volatilities on Defensive Market and Growth Equity 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 Defensive Market with a short position of Growth Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Defensive Market and Growth Equity.

Diversification Opportunities for Defensive Market and Growth Equity

0.9

Correlation Coefficient

Defensive Market  Growth Equity

Almost no diversification

The 3 months correlation between Defensive and Growth is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Defensive Market Strategies and Growth Equity Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Equity Investor and Defensive Market 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 Defensive Market Strategies are associated (or correlated) with Growth Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Equity Investor has no effect on the direction of Defensive Market i.e., Defensive Market and Growth Equity go up and down completely randomly.

Pair Corralation between Defensive Market and Growth Equity

Assuming the 90 days horizon Defensive Market Strategies is expected to generate 0.44 times more return on investment than Growth Equity. However, Defensive Market Strategies is 2.29 times less risky than Growth Equity. It trades about -0.01 of its potential returns per unit of risk. Growth Equity Investor is currently generating about -0.14 per unit of risk. If you would invest  1,191  in Defensive Market Strategies on December 5, 2024 and sell it today you would lose (1.00) from holding Defensive Market Strategies or give up 0.08% of portfolio value over 90 days.

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

Defensive Market Strategies  vs.  Growth Equity Investor

Defensive Market Str

Risk-Adjusted Performance

Very Weak

Over the last 90 days Defensive Market Strategies has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Growth Equity Investor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Growth Equity Investor has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Defensive Market and Growth Equity

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

The idea behind Defensive Market Strategies and Growth Equity Investor 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.