Correlation Between Long-term and Short Duration

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

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

Diversification Opportunities for Long-term and Short Duration

0.0

Correlation Coefficient

Long-term  Short Duration

Pay attention - limited upside

The 3 months correlation between Long-term and Short is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Long Term Government Fund and Short Duration Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration Income and Long-term 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 Long Term Government Fund are associated (or correlated) with Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration Income has no effect on the direction of Long-term i.e., Long-term and Short Duration go up and down completely randomly.

Pair Corralation between Long-term and Short Duration

If you would invest  1,349  in Long Term Government Fund on December 27, 2024 and sell it today you would earn a total of  51.00  from holding Long Term Government Fund or generate 3.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	0.0%
Values	Daily Returns

Long Term Government Fund  vs.  Short Duration Income

Long Term Government

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Long Term Government Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Long-term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Duration Income

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Long-term and Short Duration

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

The idea behind Long Term Government Fund and Short Duration Income 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.