Correlation Between Defensive Market and Value Equity

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

Diversification Opportunities for Defensive Market and Value Equity

0.94

Correlation Coefficient

Defensive Market  Value Equity

Almost no diversification

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

Pair Corralation between Defensive Market and Value Equity

Assuming the 90 days horizon Defensive Market Strategies is expected to under-perform the Value Equity. But the mutual fund apears to be less risky and, when comparing its historical volatility, Defensive Market Strategies is 1.28 times less risky than Value Equity. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Value Equity Investor is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,942  in Value Equity Investor on December 5, 2024 and sell it today you would earn a total of  16.00  from holding Value Equity Investor or generate 0.82% return on investment over 90 days.

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

Defensive Market Strategies  vs.  Value 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.

Value Equity Investor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Value Equity Investor 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.

Pair Trading with Defensive Market and Value Equity

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

The idea behind Defensive Market Strategies and Value 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.

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