Correlation Between Value Equity and Defensive Market

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

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

Diversification Opportunities for Value Equity and Defensive Market

0.81

Correlation Coefficient

Value Equity  Defensive Market

Very poor diversification

The 3 months correlation between Value and Defensive is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity Institutional 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 Value Equity 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 Value Equity Institutional 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 Value Equity i.e., Value Equity and Defensive Market go up and down completely randomly.

Pair Corralation between Value Equity and Defensive Market

Assuming the 90 days horizon Value Equity Institutional is expected to generate 1.4 times more return on investment than Defensive Market. However, Value Equity is 1.4 times more volatile than Defensive Market Strategies. It trades about 0.04 of its potential returns per unit of risk. Defensive Market Strategies is currently generating about -0.07 per unit of risk. If you would invest  1,875  in Value Equity Institutional on December 29, 2024 and sell it today you would earn a total of  31.00  from holding Value Equity Institutional or generate 1.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Value Equity Institutional  vs.  Defensive Market Strategies

Value Equity Institu

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity Institutional are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Value Equity 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

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 Value Equity and Defensive Market

The main advantage of trading using opposite Value Equity and Defensive Market positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Equity 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 Value Equity Institutional 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.

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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.