Correlation Between Principal Lifetime and Power Momentum

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

By analyzing existing cross correlation between Principal Lifetime Hybrid and Power Momentum Index, you can compare the effects of market volatilities on Principal Lifetime and Power Momentum 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 Power Momentum. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Lifetime and Power Momentum.

Diversification Opportunities for Principal Lifetime and Power Momentum

0.65

Correlation Coefficient

Principal Lifetime  Power Momentum

Poor diversification

The 3 months correlation between Principal and Power is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Principal Lifetime Hybrid and Power Momentum Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Power Momentum Index 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 Hybrid are associated (or correlated) with Power Momentum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Power Momentum Index has no effect on the direction of Principal Lifetime i.e., Principal Lifetime and Power Momentum go up and down completely randomly.

Pair Corralation between Principal Lifetime and Power Momentum

Assuming the 90 days horizon Principal Lifetime Hybrid is expected to under-perform the Power Momentum. But the mutual fund apears to be less risky and, when comparing its historical volatility, Principal Lifetime Hybrid is 1.82 times less risky than Power Momentum. The mutual fund trades about -0.13 of its potential returns per unit of risk. The Power Momentum Index is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  1,440  in Power Momentum Index on October 6, 2024 and sell it today you would lose (15.00) from holding Power Momentum Index or give up 1.04% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.62%
Values	Daily Returns

Principal Lifetime Hybrid  vs.  Power Momentum Index

Principal Lifetime Hybrid

Risk-Adjusted Performance

0 of 100

Very Weak

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

Power Momentum Index

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Power Momentum Index are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Power Momentum 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 Power Momentum

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

The idea behind Principal Lifetime Hybrid and Power Momentum Index 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.