Correlation Between Value Fund and Inverse Government

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

By analyzing existing cross correlation between Value Fund Value and Inverse Government Long, you can compare the effects of market volatilities on Value Fund and Inverse Government 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 Fund with a short position of Inverse Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Fund and Inverse Government.

Diversification Opportunities for Value Fund and Inverse Government

0.49

Correlation Coefficient

Value Fund  Inverse Government

Very weak diversification

The 3 months correlation between Value and Inverse is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund Value and Inverse Government Long in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Government Long and Value Fund 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 Fund Value are associated (or correlated) with Inverse Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Government Long has no effect on the direction of Value Fund i.e., Value Fund and Inverse Government go up and down completely randomly.

Pair Corralation between Value Fund and Inverse Government

Assuming the 90 days horizon Value Fund is expected to generate 1.05 times less return on investment than Inverse Government. But when comparing it to its historical volatility, Value Fund Value is 1.3 times less risky than Inverse Government. It trades about 0.05 of its potential returns per unit of risk. Inverse Government Long is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  15,388  in Inverse Government Long on October 10, 2024 and sell it today you would earn a total of  3,274  from holding Inverse Government Long or generate 21.28% return on investment over 90 days.

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

Value Fund Value  vs.  Inverse Government Long

Value Fund Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Value Fund Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Inverse Government Long

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inverse Government Long has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Inverse Government 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 Fund and Inverse Government

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

The idea behind Value Fund Value and Inverse Government Long 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.