Correlation Between Defensive Market and Low-duration Bond

Can any of the company-specific risk be diversified away by investing in both Defensive Market and Low-duration Bond 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 Low-duration Bond 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 Low Duration Bond Investor, you can compare the effects of market volatilities on Defensive Market and Low-duration Bond 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 Low-duration Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Defensive Market and Low-duration Bond.

Diversification Opportunities for Defensive Market and Low-duration Bond

-0.42

Correlation Coefficient

Defensive Market  Low-duration Bond

Very good diversification

The 3 months correlation between Defensive and Low-duration is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Defensive Market Strategies and Low Duration Bond Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Low Duration Bond 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 Low-duration Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Low Duration Bond has no effect on the direction of Defensive Market i.e., Defensive Market and Low-duration Bond go up and down completely randomly.

Pair Corralation between Defensive Market and Low-duration Bond

Assuming the 90 days horizon Defensive Market Strategies is expected to under-perform the Low-duration Bond. In addition to that, Defensive Market is 6.15 times more volatile than Low Duration Bond Investor. It trades about -0.03 of its total potential returns per unit of risk. Low Duration Bond Investor is currently generating about 0.17 per unit of volatility. If you would invest  1,277  in Low Duration Bond Investor on December 28, 2024 and sell it today you would earn a total of  12.00  from holding Low Duration Bond Investor or generate 0.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Defensive Market Strategies  vs.  Low Duration Bond 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 fairly strong basic indicators, Defensive Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Low Duration Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Low Duration Bond Investor are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Low-duration Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Defensive Market and Low-duration Bond

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

The idea behind Defensive Market Strategies and Low Duration Bond 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.