Correlation Between International Equity and Short Term

Can any of the company-specific risk be diversified away by investing in both International Equity and Short Term 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 Short Term 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 Short Term Bond Fund, you can compare the effects of market volatilities on International Equity and Short Term 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 Short Term. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Short Term.

Diversification Opportunities for International Equity and Short Term

0.85

Correlation Coefficient

International Equity  Short Term

Very poor diversification

The 3 months correlation between International and Short is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Fund and Short Term Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Bond 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 Short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Bond has no effect on the direction of International Equity i.e., International Equity and Short Term go up and down completely randomly.

Pair Corralation between International Equity and Short Term

Assuming the 90 days horizon International Equity Fund is expected to generate 5.38 times more return on investment than Short Term. However, International Equity is 5.38 times more volatile than Short Term Bond Fund. It trades about 0.13 of its potential returns per unit of risk. Short Term Bond Fund is currently generating about 0.18 per unit of risk. If you would invest  954.00  in International Equity Fund on December 30, 2024 and sell it today you would earn a total of  70.00  from holding International Equity Fund or generate 7.34% return on investment over 90 days.

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

International Equity Fund  vs.  Short Term Bond Fund

International Equity

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in International Equity Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, International Equity may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Short Term Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Bond Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Short Term 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 Short Term

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

The idea behind International Equity Fund and Short Term Bond Fund 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.