Correlation Between Power Momentum and Power Income

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

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

Diversification Opportunities for Power Momentum and Power Income

0.37

Correlation Coefficient

Power Momentum  Power Income

Weak diversification

The 3 months correlation between Power and Power is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding Power Momentum Index and Power Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Income and Power Momentum 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 Power Momentum Index are associated (or correlated) with Power Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Income has no effect on the direction of Power Momentum i.e., Power Momentum and Power Income go up and down completely randomly.

Pair Corralation between Power Momentum and Power Income

Assuming the 90 days horizon Power Momentum Index is expected to generate 3.19 times more return on investment than Power Income. However, Power Momentum is 3.19 times more volatile than Power Income Fund. It trades about 0.03 of its potential returns per unit of risk. Power Income Fund is currently generating about -0.17 per unit of risk. If you would invest  1,409  in Power Momentum Index on October 1, 2024 and sell it today you would earn a total of  14.00  from holding Power Momentum Index or generate 0.99% return on investment over 90 days.

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

Power Momentum Index  vs.  Power Income Fund

Power Momentum Index

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Power Momentum Index are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Power Momentum is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Power Income

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Power Momentum and Power Income

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

The idea behind Power Momentum Index and Power Income 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.