Correlation Between Real Return and All Asset

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

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

Diversification Opportunities for Real Return and All Asset

0.93

Correlation Coefficient

Real Return  All Asset

Almost no diversification

The 3 months correlation between Real and All is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Real Return Fund and All Asset Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on All Asset Fund and Real Return 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 Real Return Fund are associated (or correlated) with All Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of All Asset Fund has no effect on the direction of Real Return i.e., Real Return and All Asset go up and down completely randomly.

Pair Corralation between Real Return and All Asset

Assuming the 90 days horizon Real Return is expected to generate 2.44 times less return on investment than All Asset. But when comparing it to its historical volatility, Real Return Fund is 1.32 times less risky than All Asset. It trades about 0.03 of its potential returns per unit of risk. All Asset Fund is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,081  in All Asset Fund on September 30, 2024 and sell it today you would earn a total of  22.00  from holding All Asset Fund or generate 2.04% return on investment over 90 days.

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

Real Return Fund  vs.  All Asset Fund

Real Return Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

All Asset Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Real Return and All Asset

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

The idea behind Real Return Fund and All Asset 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.