Correlation Between SPDR SP and Alpha Architect

Can any of the company-specific risk be diversified away by investing in both SPDR SP and Alpha Architect 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 SPDR SP and Alpha Architect into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SPDR SP 400 and Alpha Architect Quantitative, you can compare the effects of market volatilities on SPDR SP and Alpha Architect 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 SPDR SP with a short position of Alpha Architect. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Alpha Architect.

Diversification Opportunities for SPDR SP and Alpha Architect

0.96

Correlation Coefficient

SPDR SP  Alpha Architect

Almost no diversification

The 3 months correlation between SPDR and Alpha is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 400 and Alpha Architect Quantitative in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alpha Architect Quan and SPDR SP 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 SPDR SP 400 are associated (or correlated) with Alpha Architect. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alpha Architect Quan has no effect on the direction of SPDR SP i.e., SPDR SP and Alpha Architect go up and down completely randomly.

Pair Corralation between SPDR SP and Alpha Architect

Given the investment horizon of 90 days SPDR SP 400 is expected to generate 0.73 times more return on investment than Alpha Architect. However, SPDR SP 400 is 1.37 times less risky than Alpha Architect. It trades about 0.18 of its potential returns per unit of risk. Alpha Architect Quantitative is currently generating about -0.01 per unit of risk. If you would invest  8,939  in SPDR SP 400 on September 16, 2024 and sell it today you would earn a total of  263.00  from holding SPDR SP 400 or generate 2.94% return on investment over 90 days.

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

SPDR SP 400  vs.  Alpha Architect Quantitative

SPDR SP 400

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 400 are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Alpha Architect Quan

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alpha Architect Quantitative are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain basic indicators, Alpha Architect may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with SPDR SP and Alpha Architect

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

The idea behind SPDR SP 400 and Alpha Architect Quantitative 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.