Correlation Between Rational Defensive and Growth Opportunities

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

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

Diversification Opportunities for Rational Defensive and Growth Opportunities

0.93

Correlation Coefficient

Rational Defensive  Growth Opportunities

Almost no diversification

The 3 months correlation between Rational and Growth is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Rational Defensive Growth and Growth Opportunities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Opportunities and Rational Defensive 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 Rational Defensive Growth are associated (or correlated) with Growth Opportunities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Opportunities has no effect on the direction of Rational Defensive i.e., Rational Defensive and Growth Opportunities go up and down completely randomly.

Pair Corralation between Rational Defensive and Growth Opportunities

Assuming the 90 days horizon Rational Defensive Growth is expected to generate 0.87 times more return on investment than Growth Opportunities. However, Rational Defensive Growth is 1.15 times less risky than Growth Opportunities. It trades about -0.1 of its potential returns per unit of risk. Growth Opportunities Fund is currently generating about -0.12 per unit of risk. If you would invest  3,988  in Rational Defensive Growth on December 30, 2024 and sell it today you would lose (333.00) from holding Rational Defensive Growth or give up 8.35% of portfolio value over 90 days.

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

Rational Defensive Growth  vs.  Growth Opportunities Fund

Rational Defensive Growth

Risk-Adjusted Performance

Very Weak

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

Growth Opportunities

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Rational Defensive and Growth Opportunities

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

The idea behind Rational Defensive Growth and Growth Opportunities 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.

Check out your portfolio center.

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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.