Correlation Between Equity Income and Strategic Equity

Can any of the company-specific risk be diversified away by investing in both Equity Income and Strategic 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 Equity Income and Strategic Equity 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 Strategic Equity Portfolio, you can compare the effects of market volatilities on Equity Income and Strategic 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 Equity Income with a short position of Strategic Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Income and Strategic Equity.

Diversification Opportunities for Equity Income and Strategic Equity

0.94

Correlation Coefficient

Equity Income  Strategic Equity

Almost no diversification

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

Pair Corralation between Equity Income and Strategic Equity

Assuming the 90 days horizon Equity Income is expected to generate 1.18 times less return on investment than Strategic Equity. But when comparing it to its historical volatility, Equity Income Portfolio is 1.08 times less risky than Strategic Equity. It trades about 0.18 of its potential returns per unit of risk. Strategic Equity Portfolio is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  2,898  in Strategic Equity Portfolio on September 5, 2024 and sell it today you would earn a total of  253.00  from holding Strategic Equity Portfolio or generate 8.73% return on investment over 90 days.

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

Equity Income Portfolio  vs.  Strategic Equity Portfolio

Equity Income Portfolio

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Strategic Equity Por

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Strategic Equity Portfolio are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Strategic Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Equity Income and Strategic Equity

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

The idea behind Equity Income Portfolio and Strategic Equity Portfolio 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.