Correlation Between Short-term Fund and Diversified Income

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

By analyzing existing cross correlation between Short Term Fund A and Diversified Income Fund, you can compare the effects of market volatilities on Short-term Fund and Diversified Income 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 Short-term Fund with a short position of Diversified Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Fund and Diversified Income.

Diversification Opportunities for Short-term Fund and Diversified Income

-0.06

Correlation Coefficient

Short-term Fund  Diversified Income

Good diversification

The 3 months correlation between Short-term and Diversified is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Fund A and Diversified Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Income and Short-term Fund 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 Short Term Fund A are associated (or correlated) with Diversified Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Income has no effect on the direction of Short-term Fund i.e., Short-term Fund and Diversified Income go up and down completely randomly.

Pair Corralation between Short-term Fund and Diversified Income

Assuming the 90 days horizon Short-term Fund is expected to generate 1.01 times less return on investment than Diversified Income. But when comparing it to its historical volatility, Short Term Fund A is 3.12 times less risky than Diversified Income. It trades about 0.24 of its potential returns per unit of risk. Diversified Income Fund is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  862.00  in Diversified Income Fund on October 3, 2024 and sell it today you would earn a total of  103.00  from holding Diversified Income Fund or generate 11.95% return on investment over 90 days.

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

Short Term Fund A  vs.  Diversified Income Fund

Short Term Fund

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Fund A are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short-term Fund is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Diversified Income

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Short-term Fund and Diversified Income

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

The idea behind Short Term Fund A and Diversified Income 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.

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 Transaction History module to view history of all your transactions and understand their impact on performance.