Correlation Between Morningstar Defensive and Gmo Small

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

By analyzing existing cross correlation between Morningstar Defensive Bond and Gmo Small Cap, you can compare the effects of market volatilities on Morningstar Defensive and Gmo Small 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 Morningstar Defensive with a short position of Gmo Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Defensive and Gmo Small.

Diversification Opportunities for Morningstar Defensive and Gmo Small

0.46

Correlation Coefficient

Morningstar Defensive  Gmo Small

Very weak diversification

The 3 months correlation between Morningstar and Gmo is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and Gmo Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gmo Small Cap and Morningstar 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 Morningstar Defensive Bond are associated (or correlated) with Gmo Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gmo Small Cap has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and Gmo Small go up and down completely randomly.

Pair Corralation between Morningstar Defensive and Gmo Small

Assuming the 90 days horizon Morningstar Defensive Bond is expected to generate 0.1 times more return on investment than Gmo Small. However, Morningstar Defensive Bond is 10.35 times less risky than Gmo Small. It trades about -0.29 of its potential returns per unit of risk. Gmo Small Cap is currently generating about -0.45 per unit of risk. If you would invest  973.00  in Morningstar Defensive Bond on October 13, 2024 and sell it today you would lose (8.00) from holding Morningstar Defensive Bond or give up 0.82% of portfolio value over 90 days.

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

Morningstar Defensive Bond  vs.  Gmo Small Cap

Morningstar Defensive

Risk-Adjusted Performance

0 of 100

Very Weak

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

Gmo Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Gmo Small Cap 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 Morningstar Defensive and Gmo Small

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

The idea behind Morningstar Defensive Bond and Gmo Small Cap 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.