Correlation Between Equity Index and Low-duration Bond

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

Diversification Opportunities for Equity Index and Low-duration Bond

-0.61

Correlation Coefficient

Equity Index  Low-duration Bond

Excellent diversification

The 3 months correlation between Equity and Low-duration is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Investor 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 Investor are associated (or correlated) with Low-duration Bond. 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 Bond go up and down completely randomly.

Pair Corralation between Equity Index and Low-duration Bond

Assuming the 90 days horizon Equity Index Investor is expected to under-perform the Low-duration Bond. In addition to that, Equity Index is 10.92 times more volatile than Low Duration Bond Investor. It trades about -0.07 of its total potential returns per unit of risk. Low Duration Bond Investor is currently generating about 0.2 per unit of volatility. If you would invest  1,275  in Low Duration Bond Investor on December 27, 2024 and sell it today you would earn a total of  14.00  from holding Low Duration Bond Investor or generate 1.1% return on investment over 90 days.

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

Equity Index Investor  vs.  Low Duration Bond Investor

Equity Index Investor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Index Investor has generated negative risk-adjusted returns adding no value to fund investors. 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

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Low Duration Bond Investor are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Low-duration Bond 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 Bond

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

The idea behind Equity Index Investor 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.