Correlation Between Government Long and Strengthening Dollar

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

By analyzing existing cross correlation between Government Long Bond and Strengthening Dollar 2x, you can compare the effects of market volatilities on Government Long and Strengthening Dollar 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 Government Long with a short position of Strengthening Dollar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Government Long and Strengthening Dollar.

Diversification Opportunities for Government Long and Strengthening Dollar

-0.8

Correlation Coefficient

Government Long  Strengthening Dollar

Pay attention - limited upside

The 3 months correlation between Government and Strengthening is -0.8. Overlapping area represents the amount of risk that can be diversified away by holding Government Long Bond and Strengthening Dollar 2x in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strengthening Dollar and Government Long 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 Government Long Bond are associated (or correlated) with Strengthening Dollar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strengthening Dollar has no effect on the direction of Government Long i.e., Government Long and Strengthening Dollar go up and down completely randomly.

Pair Corralation between Government Long and Strengthening Dollar

Assuming the 90 days horizon Government Long Bond is expected to under-perform the Strengthening Dollar. But the mutual fund apears to be less risky and, when comparing its historical volatility, Government Long Bond is 1.07 times less risky than Strengthening Dollar. The mutual fund trades about -0.31 of its potential returns per unit of risk. The Strengthening Dollar 2x is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  6,815  in Strengthening Dollar 2x on September 26, 2024 and sell it today you would lose (40.00) from holding Strengthening Dollar 2x or give up 0.59% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Government Long Bond  vs.  Strengthening Dollar 2x

Government Long Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Government Long Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental drivers remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Strengthening Dollar

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Strengthening Dollar 2x are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Strengthening Dollar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Government Long and Strengthening Dollar

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

The idea behind Government Long Bond and Strengthening Dollar 2x 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.