Correlation Between Short Precious and Equity Income

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

By analyzing existing cross correlation between Short Precious Metals and Equity Income Portfolio, you can compare the effects of market volatilities on Short Precious and Equity Income 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 Precious with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Precious and Equity Income.

Diversification Opportunities for Short Precious and Equity Income

-0.41

Correlation Coefficient

Short Precious  Equity Income

Very good diversification

The 3 months correlation between Short and Equity is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Short Precious Metals and Equity Income Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income Portfolio and Short Precious 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 Precious Metals are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income Portfolio has no effect on the direction of Short Precious i.e., Short Precious and Equity Income go up and down completely randomly.

Pair Corralation between Short Precious and Equity Income

Assuming the 90 days horizon Short Precious Metals is expected to under-perform the Equity Income. In addition to that, Short Precious is 2.28 times more volatile than Equity Income Portfolio. It trades about -0.24 of its total potential returns per unit of risk. Equity Income Portfolio is currently generating about 0.05 per unit of volatility. If you would invest  1,462  in Equity Income Portfolio on December 20, 2024 and sell it today you would earn a total of  29.00  from holding Equity Income Portfolio or generate 1.98% return on investment over 90 days.

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

Short Precious Metals  vs.  Equity Income Portfolio

Short Precious Metals

Risk-Adjusted Performance

Very Weak

Over the last 90 days Short Precious Metals has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Equity Income Portfolio

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Equity Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short Precious and Equity Income

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

The idea behind Short Precious Metals and Equity Income Portfolio 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.

Check out your portfolio center.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.