Correlation Between Secured Options and Equity Income

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

By analyzing existing cross correlation between Secured Options Portfolio and Equity Income Portfolio, you can compare the effects of market volatilities on Secured Options and Equity Income 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 Secured Options with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Secured Options and Equity Income.

Diversification Opportunities for Secured Options and Equity Income

0.53

Correlation Coefficient

Secured Options  Equity Income

Very weak diversification

The 3 months correlation between Secured and Equity is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Secured Options Portfolio and Equity Income Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income Portfolio and Secured Options 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 Secured Options Portfolio are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income Portfolio has no effect on the direction of Secured Options i.e., Secured Options and Equity Income go up and down completely randomly.

Pair Corralation between Secured Options and Equity Income

Assuming the 90 days horizon Secured Options Portfolio is expected to under-perform the Equity Income. But the mutual fund apears to be less risky and, when comparing its historical volatility, Secured Options Portfolio is 1.27 times less risky than Equity Income. The mutual fund trades about -0.08 of its potential returns per unit of risk. The Equity Income Portfolio is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,454  in Equity Income Portfolio on December 30, 2024 and sell it today you would earn a total of  17.00  from holding Equity Income Portfolio or generate 1.17% return on investment over 90 days.

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

Secured Options Portfolio  vs.  Equity Income Portfolio

Secured Options Portfolio

Risk-Adjusted Performance

Very Weak

Over the last 90 days Secured Options Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Secured Options is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Income Portfolio

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Equity Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Secured Options and Equity Income

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

The idea behind Secured Options Portfolio and Equity Income Portfolio 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.