Correlation Between Low-duration Bond and Medium-duration Bond

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

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

Diversification Opportunities for Low-duration Bond and Medium-duration Bond

0.87

Correlation Coefficient

Low-duration Bond  Medium-duration Bond

Very poor diversification

The 3 months correlation between Low-duration and Medium-duration is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Low Duration Bond Investor and Medium Duration Bond Instituti in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Medium Duration Bond and Low-duration Bond 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 Low Duration Bond Investor are associated (or correlated) with Medium-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 Medium Duration Bond has no effect on the direction of Low-duration Bond i.e., Low-duration Bond and Medium-duration Bond go up and down completely randomly.

Pair Corralation between Low-duration Bond and Medium-duration Bond

Assuming the 90 days horizon Low Duration Bond Investor is not expected to generate positive returns. However, Low Duration Bond Investor is 3.03 times less risky than Medium-duration Bond. It waists most of its returns potential to compensate for thr risk taken. Medium-duration Bond is generating about -0.55 per unit of risk. If you would invest  1,286  in Low Duration Bond Investor on October 10, 2024 and sell it today you would earn a total of  0.00  from holding Low Duration Bond Investor or generate 0.0% return on investment over 90 days.

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

Low Duration Bond Investor  vs.  Medium Duration Bond Instituti

Low Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Medium Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Medium Duration Bond Institutional has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Medium-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 Low-duration Bond and Medium-duration Bond

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

The idea behind Low Duration Bond Investor and Medium Duration Bond Institutional 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.