Correlation Between Equity Income and Longshort Portfolio

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

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

Diversification Opportunities for Equity Income and Longshort Portfolio

0.77

Correlation Coefficient

Equity Income  Longshort Portfolio

Poor diversification

The 3 months correlation between Equity and Longshort is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Portfolio and Longshort Portfolio Longshort in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Longshort Portfolio and Equity Income 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 Equity Income Portfolio are associated (or correlated) with Longshort Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Longshort Portfolio has no effect on the direction of Equity Income i.e., Equity Income and Longshort Portfolio go up and down completely randomly.

Pair Corralation between Equity Income and Longshort Portfolio

Assuming the 90 days horizon Equity Income Portfolio is expected to under-perform the Longshort Portfolio. But the mutual fund apears to be less risky and, when comparing its historical volatility, Equity Income Portfolio is 1.05 times less risky than Longshort Portfolio. The mutual fund trades about -0.35 of its potential returns per unit of risk. The Longshort Portfolio Longshort is currently generating about -0.21 of returns per unit of risk over similar time horizon. If you would invest  1,460  in Longshort Portfolio Longshort on September 29, 2024 and sell it today you would lose (118.00) from holding Longshort Portfolio Longshort or give up 8.08% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

Equity Income Portfolio  vs.  Longshort Portfolio Longshort

Equity Income Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

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

Longshort Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Equity Income and Longshort Portfolio

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

The idea behind Equity Income Portfolio and Longshort Portfolio Longshort 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.