Correlation Between Principal Lifetime and Equity Income

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

By analyzing existing cross correlation between Principal Lifetime 2050 and Equity Income Fund, you can compare the effects of market volatilities on Principal Lifetime and Equity 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 Principal Lifetime with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Lifetime and Equity Income.

Diversification Opportunities for Principal Lifetime and Equity Income

0.74

Correlation Coefficient

Principal Lifetime  Equity Income

Poor diversification

The 3 months correlation between Principal and Equity is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Principal Lifetime 2050 and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Principal Lifetime 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 Principal Lifetime 2050 are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Principal Lifetime i.e., Principal Lifetime and Equity Income go up and down completely randomly.

Pair Corralation between Principal Lifetime and Equity Income

Assuming the 90 days horizon Principal Lifetime 2050 is expected to under-perform the Equity Income. In addition to that, Principal Lifetime is 1.05 times more volatile than Equity Income Fund. It trades about -0.01 of its total potential returns per unit of risk. Equity Income Fund is currently generating about -0.01 per unit of volatility. If you would invest  3,926  in Equity Income Fund on December 22, 2024 and sell it today you would lose (22.00) from holding Equity Income Fund or give up 0.56% of portfolio value over 90 days.

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

Principal Lifetime 2050  vs.  Equity Income Fund

Principal Lifetime 2050

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Lifetime 2050 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking indicators, Principal Lifetime is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Income

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward-looking indicators, Equity 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 Principal Lifetime and Equity Income

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

The idea behind Principal Lifetime 2050 and Equity 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.