Correlation Between Equity Income and Principal Capital

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

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

Diversification Opportunities for Equity Income and Principal Capital

0.79

Correlation Coefficient

Equity Income  Principal Capital

Poor diversification

The 3 months correlation between Equity and Principal is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Fund and Principal Capital Appreciation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Capital and Equity Income 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 Equity Income Fund are associated (or correlated) with Principal Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Capital has no effect on the direction of Equity Income i.e., Equity Income and Principal Capital go up and down completely randomly.

Pair Corralation between Equity Income and Principal Capital

Assuming the 90 days horizon Equity Income Fund is expected to generate 0.7 times more return on investment than Principal Capital. However, Equity Income Fund is 1.43 times less risky than Principal Capital. It trades about 0.19 of its potential returns per unit of risk. Principal Capital Appreciation is currently generating about 0.02 per unit of risk. If you would invest  3,888  in Equity Income Fund on December 2, 2024 and sell it today you would earn a total of  192.00  from holding Equity Income Fund or generate 4.94% return on investment over 90 days.

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

Equity Income Fund  vs.  Principal Capital Appreciation

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 latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Principal Capital

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Capital Appreciation has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Equity Income and Principal Capital

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

The idea behind Equity Income Fund and Principal Capital Appreciation 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.