Correlation Between Equity Index and Low Duration

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

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

Diversification Opportunities for Equity Index and Low Duration

-0.13

Correlation Coefficient

Equity Index  Low Duration

Good diversification

The 3 months correlation between Equity and Low is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Institutional 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 Equity Index 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 Index Institutional are associated (or correlated) with Low Duration. 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 Equity Index i.e., Equity Index and Low Duration go up and down completely randomly.

Pair Corralation between Equity Index and Low Duration

Assuming the 90 days horizon Equity Index Institutional is expected to generate 6.07 times more return on investment than Low Duration. However, Equity Index is 6.07 times more volatile than Low Duration Bond Investor. It trades about 0.09 of its potential returns per unit of risk. Low Duration Bond Investor is currently generating about 0.13 per unit of risk. If you would invest  4,191  in Equity Index Institutional on October 23, 2024 and sell it today you would earn a total of  1,717  from holding Equity Index Institutional or generate 40.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Equity Index Institutional  vs.  Low Duration Bond Investor

Equity Index Institu

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Index Institutional are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Equity Index 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

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Low Duration Bond Investor are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Low Duration 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 Index and Low Duration

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

The idea behind Equity Index Institutional 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.

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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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.