Correlation Between Government Long and Inverse Russell

Can any of the company-specific risk be diversified away by investing in both Government Long and Inverse Russell 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 Russell 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 Russell 2000, you can compare the effects of market volatilities on Government Long and Inverse Russell 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 Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Government Long and Inverse Russell.

Diversification Opportunities for Government Long and Inverse Russell

0.99

Correlation Coefficient

Government Long  Inverse Russell

No risk reduction

The 3 months correlation between Government and Inverse is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Government Long Bond and Inverse Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Russell 2000 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 Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Russell 2000 has no effect on the direction of Government Long i.e., Government Long and Inverse Russell go up and down completely randomly.

Pair Corralation between Government Long and Inverse Russell

Assuming the 90 days horizon Government Long Bond is expected to generate 1.94 times more return on investment than Inverse Russell. However, Government Long is 1.94 times more volatile than Inverse Russell 2000. It trades about 0.17 of its potential returns per unit of risk. Inverse Russell 2000 is currently generating about 0.16 per unit of risk. If you would invest  2,272  in Government Long Bond on November 28, 2024 and sell it today you would earn a total of  8,740  from holding Government Long Bond or generate 384.68% return on investment over 90 days.

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

Government Long Bond  vs.  Inverse Russell 2000

Government Long Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Government Long Bond are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly unfluctuating technical and fundamental indicators, Government Long showed solid returns over the last few months and may actually be approaching a breakup point.

Inverse Russell 2000

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Russell 2000 are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Inverse Russell showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Government Long and Inverse Russell

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

The idea behind Government Long Bond and Inverse Russell 2000 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.