Correlation Between M Large and Short-term Government

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

By analyzing existing cross correlation between M Large Cap and Short Term Government Securities, you can compare the effects of market volatilities on M Large and Short-term 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 M Large with a short position of Short-term Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of M Large and Short-term Government.

Diversification Opportunities for M Large and Short-term Government

0.1

Correlation Coefficient

M Large  Short-term Government

Average diversification

The 3 months correlation between MTCGX and SHORT-TERM is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding M Large Cap and Short Term Government Securiti in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Government and M Large 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 M Large Cap are associated (or correlated) with Short-term Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Government has no effect on the direction of M Large i.e., M Large and Short-term Government go up and down completely randomly.

Pair Corralation between M Large and Short-term Government

Assuming the 90 days horizon M Large Cap is expected to generate 7.99 times more return on investment than Short-term Government. However, M Large is 7.99 times more volatile than Short Term Government Securities. It trades about 0.02 of its potential returns per unit of risk. Short Term Government Securities is currently generating about 0.08 per unit of risk. If you would invest  3,356  in M Large Cap on October 25, 2024 and sell it today you would earn a total of  161.00  from holding M Large Cap or generate 4.8% return on investment over 90 days.

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

M Large Cap  vs.  Short Term Government Securiti

M Large Cap

Risk-Adjusted Performance

0 of 100

Very Weak

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

Short Term Government

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Securities are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Short-term 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 M Large and Short-term Government

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

The idea behind M Large Cap and Short Term Government Securities 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.