Correlation Between Equity Index and Growth Allocation

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

By analyzing existing cross correlation between Equity Index Investor and Growth Allocation Fund, you can compare the effects of market volatilities on Equity Index and Growth Allocation 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 Growth Allocation. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Index and Growth Allocation.

Diversification Opportunities for Equity Index and Growth Allocation

0.81

Correlation Coefficient

Equity Index  Growth Allocation

Very poor diversification

The 3 months correlation between Equity and Growth is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Investor and Growth Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Allocation 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 Investor are associated (or correlated) with Growth Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Allocation has no effect on the direction of Equity Index i.e., Equity Index and Growth Allocation go up and down completely randomly.

Pair Corralation between Equity Index and Growth Allocation

Assuming the 90 days horizon Equity Index Investor is expected to under-perform the Growth Allocation. In addition to that, Equity Index is 2.09 times more volatile than Growth Allocation Fund. It trades about -0.03 of its total potential returns per unit of risk. Growth Allocation Fund is currently generating about 0.19 per unit of volatility. If you would invest  1,320  in Growth Allocation Fund on September 16, 2024 and sell it today you would earn a total of  20.00  from holding Growth Allocation Fund or generate 1.52% return on investment over 90 days.

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

Equity Index Investor  vs.  Growth Allocation Fund

Equity Index Investor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Index Investor are ranked lower than 8 (%) 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.

Growth Allocation

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Growth Allocation Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Growth Allocation 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 Growth Allocation

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

The idea behind Equity Index Investor and Growth Allocation Fund 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.