Correlation Between Rational Strategic and Rational Defensive

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

By analyzing existing cross correlation between Rational Strategic Allocation and Rational Defensive Growth, you can compare the effects of market volatilities on Rational Strategic and Rational Defensive 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 Rational Strategic with a short position of Rational Defensive. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rational Strategic and Rational Defensive.

Diversification Opportunities for Rational Strategic and Rational Defensive

0.95

Correlation Coefficient

Rational Strategic  Rational Defensive

Almost no diversification

The 3 months correlation between Rational and Rational is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Rational Strategic Allocation and Rational Defensive Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rational Defensive Growth and Rational Strategic 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 Rational Strategic Allocation are associated (or correlated) with Rational Defensive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rational Defensive Growth has no effect on the direction of Rational Strategic i.e., Rational Strategic and Rational Defensive go up and down completely randomly.

Pair Corralation between Rational Strategic and Rational Defensive

Assuming the 90 days horizon Rational Strategic Allocation is expected to under-perform the Rational Defensive. In addition to that, Rational Strategic is 1.42 times more volatile than Rational Defensive Growth. It trades about -0.09 of its total potential returns per unit of risk. Rational Defensive Growth is currently generating about -0.1 per unit of volatility. If you would invest  6,594  in Rational Defensive Growth on December 30, 2024 and sell it today you would lose (546.00) from holding Rational Defensive Growth or give up 8.28% of portfolio value over 90 days.

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

Rational Strategic Allocation  vs.  Rational Defensive Growth

Rational Strategic

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rational Strategic Allocation 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.

Rational Defensive Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Rational Defensive Growth 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 Rational Strategic and Rational Defensive

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

The idea behind Rational Strategic Allocation and Rational Defensive Growth 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.