Correlation Between Government Long and Inverse Emerging

Can any of the company-specific risk be diversified away by investing in both Government Long and Inverse Emerging 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 Inverse Emerging 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 Inverse Emerging Markets, you can compare the effects of market volatilities on Government Long and Inverse Emerging 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 Inverse Emerging. Check out your portfolio center. Please also check ongoing floating volatility patterns of Government Long and Inverse Emerging.

Diversification Opportunities for Government Long and Inverse Emerging

-0.55

Correlation Coefficient

Government Long  Inverse Emerging

Excellent diversification

The 3 months correlation between Government and Inverse is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Government Long Bond and Inverse Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Emerging Markets 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 Inverse Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Emerging Markets has no effect on the direction of Government Long i.e., Government Long and Inverse Emerging go up and down completely randomly.

Pair Corralation between Government Long and Inverse Emerging

Assuming the 90 days horizon Government Long Bond is expected to under-perform the Inverse Emerging. But the mutual fund apears to be less risky and, when comparing its historical volatility, Government Long Bond is 2.82 times less risky than Inverse Emerging. The mutual fund trades about -0.46 of its potential returns per unit of risk. The Inverse Emerging Markets is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  898.00  in Inverse Emerging Markets on October 3, 2024 and sell it today you would lose (10.00) from holding Inverse Emerging Markets or give up 1.11% of portfolio value over 90 days.

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

Government Long Bond  vs.  Inverse Emerging Markets

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.

Inverse Emerging Markets

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Emerging Markets are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Inverse Emerging showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Government Long and Inverse Emerging

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

The idea behind Government Long Bond and Inverse Emerging 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.