Correlation Between Short-term Bond and Investment Grade

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

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

Diversification Opportunities for Short-term Bond and Investment Grade

0.91

Correlation Coefficient

Short-term Bond  Investment Grade

Almost no diversification

The 3 months correlation between Short-term and Investment is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Bond Fund and Investment Grade Porate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Grade Porate and Short-term Bond 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 Bond Fund are associated (or correlated) with Investment Grade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Grade Porate has no effect on the direction of Short-term Bond i.e., Short-term Bond and Investment Grade go up and down completely randomly.

Pair Corralation between Short-term Bond and Investment Grade

Assuming the 90 days horizon Short-term Bond is expected to generate 1.88 times less return on investment than Investment Grade. But when comparing it to its historical volatility, Short Term Bond Fund is 2.72 times less risky than Investment Grade. It trades about 0.22 of its potential returns per unit of risk. Investment Grade Porate is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  877.00  in Investment Grade Porate on December 23, 2024 and sell it today you would earn a total of  28.00  from holding Investment Grade Porate or generate 3.19% return on investment over 90 days.

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

Short Term Bond Fund  vs.  Investment Grade Porate

Short Term Bond

Risk-Adjusted Performance

Solid

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

Investment Grade Porate

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Grade Porate are ranked lower than 12 (%) 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.

Pair Trading with Short-term Bond and Investment Grade

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

The idea behind Short Term Bond Fund and Investment Grade Porate 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.