Correlation Between High Yield and Low Duration

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

By analyzing existing cross correlation between High Yield Fund and Low Duration Fund, you can compare the effects of market volatilities on High Yield and Low 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 High Yield with a short position of Low Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of High Yield and Low Duration.

Diversification Opportunities for High Yield and Low Duration

0.84

Correlation Coefficient

High Yield  Low Duration

Very poor diversification

The 3 months correlation between High and Low is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding High Yield Fund and Low Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Low Duration and High Yield 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 High Yield Fund are associated (or correlated) with Low Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Low Duration has no effect on the direction of High Yield i.e., High Yield and Low Duration go up and down completely randomly.

Pair Corralation between High Yield and Low Duration

Assuming the 90 days horizon High Yield is expected to generate 1.13 times less return on investment than Low Duration. In addition to that, High Yield is 1.67 times more volatile than Low Duration Fund. It trades about 0.12 of its total potential returns per unit of risk. Low Duration Fund is currently generating about 0.23 per unit of volatility. If you would invest  914.00  in Low Duration Fund on December 27, 2024 and sell it today you would earn a total of  16.00  from holding Low Duration Fund or generate 1.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.36%
Values	Daily Returns

High Yield Fund  vs.  Low Duration Fund

High Yield Fund

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in High Yield Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, High Yield is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Low Duration

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Low Duration Fund are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Low 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 High Yield and Low Duration

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

The idea behind High Yield Fund and Low Duration 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.