Correlation Between Moderately Aggressive and Target Retirement

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

By analyzing existing cross correlation between Moderately Aggressive Balanced and Target Retirement 2040, you can compare the effects of market volatilities on Moderately Aggressive and Target Retirement 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 Moderately Aggressive with a short position of Target Retirement. Check out your portfolio center. Please also check ongoing floating volatility patterns of Moderately Aggressive and Target Retirement.

Diversification Opportunities for Moderately Aggressive and Target Retirement

0.92

Correlation Coefficient

Moderately Aggressive  Target Retirement

Almost no diversification

The 3 months correlation between Moderately and Target is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Moderately Aggressive Balanced and Target Retirement 2040 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target Retirement 2040 and Moderately Aggressive 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 Moderately Aggressive Balanced are associated (or correlated) with Target Retirement. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target Retirement 2040 has no effect on the direction of Moderately Aggressive i.e., Moderately Aggressive and Target Retirement go up and down completely randomly.

Pair Corralation between Moderately Aggressive and Target Retirement

Assuming the 90 days horizon Moderately Aggressive Balanced is expected to under-perform the Target Retirement. But the mutual fund apears to be less risky and, when comparing its historical volatility, Moderately Aggressive Balanced is 1.02 times less risky than Target Retirement. The mutual fund trades about -0.1 of its potential returns per unit of risk. The Target Retirement 2040 is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,354  in Target Retirement 2040 on November 28, 2024 and sell it today you would lose (20.00) from holding Target Retirement 2040 or give up 1.48% of portfolio value over 90 days.

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

Moderately Aggressive Balanced  vs.  Target Retirement 2040

Moderately Aggressive

Risk-Adjusted Performance

Very Weak

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

Target Retirement 2040

Risk-Adjusted Performance

Very Weak

Over the last 90 days Target Retirement 2040 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Target Retirement is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Moderately Aggressive and Target Retirement

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

The idea behind Moderately Aggressive Balanced and Target Retirement 2040 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.