Correlation Between International Equity and Homestead Intermediate

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

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

Diversification Opportunities for International Equity and Homestead Intermediate

0.7

Correlation Coefficient

International Equity  Homestead Intermediate

Poor diversification

The 3 months correlation between International and Homestead is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Fund and Homestead Intermediate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Homestead Intermediate and International 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 International Equity Fund are associated (or correlated) with Homestead Intermediate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Homestead Intermediate has no effect on the direction of International Equity i.e., International Equity and Homestead Intermediate go up and down completely randomly.

Pair Corralation between International Equity and Homestead Intermediate

Assuming the 90 days horizon International Equity Fund is expected to generate 2.62 times more return on investment than Homestead Intermediate. However, International Equity is 2.62 times more volatile than Homestead Intermediate Bond. It trades about -0.02 of its potential returns per unit of risk. Homestead Intermediate Bond is currently generating about -0.07 per unit of risk. If you would invest  1,020  in International Equity Fund on September 5, 2024 and sell it today you would lose (13.00) from holding International Equity Fund or give up 1.27% of portfolio value over 90 days.

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

International Equity Fund  vs.  Homestead Intermediate Bond

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Homestead Intermediate

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with International Equity and Homestead Intermediate

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

The idea behind International Equity Fund and Homestead Intermediate Bond 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.