Correlation Between Us Government and International Equity

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

By analyzing existing cross correlation between Us Government Plus and The International Equity, you can compare the effects of market volatilities on Us Government and International Equity 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 Us Government with a short position of International Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Us Government and International Equity.

Diversification Opportunities for Us Government and International Equity

0.74

Correlation Coefficient

Us Government  International Equity

Poor diversification

The 3 months correlation between GVPIX and International is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Us Government Plus and The International Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The International Equity and Us Government 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 Us Government Plus are associated (or correlated) with International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The International Equity has no effect on the direction of Us Government i.e., Us Government and International Equity go up and down completely randomly.

Pair Corralation between Us Government and International Equity

Assuming the 90 days horizon Us Government is expected to generate 2.06 times less return on investment than International Equity. But when comparing it to its historical volatility, Us Government Plus is 1.03 times less risky than International Equity. It trades about 0.06 of its potential returns per unit of risk. The International Equity is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,272  in The International Equity on December 31, 2024 and sell it today you would earn a total of  91.00  from holding The International Equity or generate 7.15% return on investment over 90 days.

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

Us Government Plus  vs.  The International Equity

Us Government Plus

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Us Government Plus are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Us Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

The International Equity

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The International Equity are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward-looking signals, International Equity may actually be approaching a critical reversion point that can send shares even higher in May 2025.

Pair Trading with Us Government and International Equity

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

The idea behind Us Government Plus and The International Equity 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.