Correlation Between Long-term and Real Return

Can any of the company-specific risk be diversified away by investing in both Long-term and Real Return 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 Real Return 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 Real Return Fund, you can compare the effects of market volatilities on Long-term and Real Return 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 Real Return. Check out your portfolio center. Please also check ongoing floating volatility patterns of Long-term and Real Return.

Diversification Opportunities for Long-term and Real Return

0.91

Correlation Coefficient

Long-term  Real Return

Almost no diversification

The 3 months correlation between Long-term and Real is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Long Term Government Fund and Real Return Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Return Fund 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 Real Return. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Return Fund has no effect on the direction of Long-term i.e., Long-term and Real Return go up and down completely randomly.

Pair Corralation between Long-term and Real Return

Assuming the 90 days horizon Long Term Government Fund is expected to under-perform the Real Return. In addition to that, Long-term is 2.8 times more volatile than Real Return Fund. It trades about -0.05 of its total potential returns per unit of risk. Real Return Fund is currently generating about -0.02 per unit of volatility. If you would invest  1,018  in Real Return Fund on September 3, 2024 and sell it today you would lose (3.00) from holding Real Return Fund or give up 0.29% of portfolio value over 90 days.

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

Long Term Government Fund  vs.  Real Return Fund

Long Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Long Term Government Fund has generated negative risk-adjusted returns adding no value to fund investors. 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.

Real Return Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Real Return Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Real Return 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 Real Return

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

The idea behind Long Term Government Fund and Real Return 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.