Correlation Between Growth Allocation and Balanced Allocation

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

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

Diversification Opportunities for Growth Allocation and Balanced Allocation

0.9

Correlation Coefficient

Growth Allocation  Balanced Allocation

Almost no diversification

The 3 months correlation between Growth and Balanced is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Growth Allocation Fund and Balanced Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Allocation and Growth Allocation 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 Growth Allocation Fund are associated (or correlated) with Balanced Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Allocation has no effect on the direction of Growth Allocation i.e., Growth Allocation and Balanced Allocation go up and down completely randomly.

Pair Corralation between Growth Allocation and Balanced Allocation

Assuming the 90 days horizon Growth Allocation Fund is expected to under-perform the Balanced Allocation. In addition to that, Growth Allocation is 1.36 times more volatile than Balanced Allocation Fund. It trades about -0.06 of its total potential returns per unit of risk. Balanced Allocation Fund is currently generating about -0.04 per unit of volatility. If you would invest  1,191  in Balanced Allocation Fund on December 5, 2024 and sell it today you would lose (14.00) from holding Balanced Allocation Fund or give up 1.18% of portfolio value over 90 days.

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

Growth Allocation Fund  vs.  Balanced Allocation Fund

Growth Allocation

Risk-Adjusted Performance

Very Weak

Over the last 90 days Growth Allocation Fund has generated negative risk-adjusted returns adding no value to fund investors. 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.

Balanced Allocation

Risk-Adjusted Performance

Very Weak

Over the last 90 days Balanced Allocation Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Balanced 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 Growth Allocation and Balanced Allocation

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

The idea behind Growth Allocation Fund and Balanced 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.

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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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.