Correlation Between Value Equity and Equity Index

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

By analyzing existing cross correlation between Value Equity Investor and Equity Index Investor, you can compare the effects of market volatilities on Value Equity and Equity Index 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 Equity Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Equity and Equity Index.

Diversification Opportunities for Value Equity and Equity Index

0.56

Correlation Coefficient

Value Equity  Equity Index

Very weak diversification

The 3 months correlation between Value and Equity is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity Investor and Equity Index Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Index Investor 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 Investor are associated (or correlated) with Equity Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Index Investor has no effect on the direction of Value Equity i.e., Value Equity and Equity Index go up and down completely randomly.

Pair Corralation between Value Equity and Equity Index

Assuming the 90 days horizon Value Equity Investor is expected to under-perform the Equity Index. In addition to that, Value Equity is 2.81 times more volatile than Equity Index Investor. It trades about -0.21 of its total potential returns per unit of risk. Equity Index Investor is currently generating about 0.06 per unit of volatility. If you would invest  6,003  in Equity Index Investor on September 17, 2024 and sell it today you would earn a total of  48.00  from holding Equity Index Investor or generate 0.8% return on investment over 90 days.

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

Value Equity Investor  vs.  Equity Index Investor

Value Equity Investor

Risk-Adjusted Performance

0 of 100

Very Weak

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

Equity Index Investor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Index Investor are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Equity Index 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 Equity Index

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

The idea behind Value Equity Investor and Equity Index Investor 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.