Correlation Between Investment Grade and Real Return

Can any of the company-specific risk be diversified away by investing in both Investment Grade 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 Investment Grade and Real Return into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Investment Grade Porate and Real Return Asset, you can compare the effects of market volatilities on Investment Grade 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 Investment Grade with a short position of Real Return. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment Grade and Real Return.

Diversification Opportunities for Investment Grade and Real Return

0.83

Correlation Coefficient

Investment Grade  Real Return

Very poor diversification

The 3 months correlation between Investment and Real is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Investment Grade Porate and Real Return Asset in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Return Asset and Investment Grade 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 Investment Grade Porate 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 Asset has no effect on the direction of Investment Grade i.e., Investment Grade and Real Return go up and down completely randomly.

Pair Corralation between Investment Grade and Real Return

Assuming the 90 days horizon Investment Grade is expected to generate 1.04 times less return on investment than Real Return. But when comparing it to its historical volatility, Investment Grade Porate is 2.21 times less risky than Real Return. It trades about 0.05 of its potential returns per unit of risk. Real Return Asset is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,228  in Real Return Asset on December 2, 2024 and sell it today you would earn a total of  11.00  from holding Real Return Asset or generate 0.9% return on investment over 90 days.

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

Investment Grade Porate  vs.  Real Return Asset

Investment Grade Porate

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Grade Porate are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Investment Grade is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Real Return Asset

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Real Return Asset are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward 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 Investment Grade and Real Return

The main advantage of trading using opposite Investment Grade and Real Return positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investment Grade 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 Investment Grade Porate and Real Return Asset 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.