Correlation Between Short Duration and International Developed

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

By analyzing existing cross correlation between Short Duration Bond and International Developed Markets, you can compare the effects of market volatilities on Short Duration and International Developed 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 Duration with a short position of International Developed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Duration and International Developed.

Diversification Opportunities for Short Duration and International Developed

0.58

Correlation Coefficient

Short Duration  International Developed

Very weak diversification

The 3 months correlation between Short and International is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Short Duration Bond and International Developed Market in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Developed and Short Duration 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 Duration Bond are associated (or correlated) with International Developed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Developed has no effect on the direction of Short Duration i.e., Short Duration and International Developed go up and down completely randomly.

Pair Corralation between Short Duration and International Developed

Assuming the 90 days horizon Short Duration is expected to generate 1.69 times less return on investment than International Developed. But when comparing it to its historical volatility, Short Duration Bond is 5.36 times less risky than International Developed. It trades about 0.12 of its potential returns per unit of risk. International Developed Markets is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  3,587  in International Developed Markets on September 26, 2024 and sell it today you would earn a total of  529.00  from holding International Developed Markets or generate 14.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	99.8%
Values	Daily Returns

Short Duration Bond  vs.  International Developed Market

Short Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

International Developed

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Developed Markets 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 Short Duration and International Developed

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

The idea behind Short Duration Bond and International Developed Markets 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.