Correlation Between Medium-duration Bond and Defensive Market

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

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

Diversification Opportunities for Medium-duration Bond and Defensive Market

0.64

Correlation Coefficient

Medium-duration Bond  Defensive Market

Poor diversification

The 3 months correlation between Medium-duration and Defensive is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Medium Duration Bond Investor and Defensive Market Strategies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defensive Market Str and Medium-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 Medium Duration Bond Investor are associated (or correlated) with Defensive Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defensive Market Str has no effect on the direction of Medium-duration Bond i.e., Medium-duration Bond and Defensive Market go up and down completely randomly.

Pair Corralation between Medium-duration Bond and Defensive Market

Assuming the 90 days horizon Medium Duration Bond Investor is expected to under-perform the Defensive Market. But the mutual fund apears to be less risky and, when comparing its historical volatility, Medium Duration Bond Investor is 1.7 times less risky than Defensive Market. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Defensive Market Strategies is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,172  in Defensive Market Strategies on October 20, 2024 and sell it today you would earn a total of  12.00  from holding Defensive Market Strategies or generate 1.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.0%
Values	Daily Returns

Medium Duration Bond Investor  vs.  Defensive Market Strategies

Medium Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Medium Duration Bond Investor 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.

Defensive Market Str

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Medium-duration Bond and Defensive Market

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

The idea behind Medium Duration Bond Investor and Defensive Market Strategies 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.