Correlation Between SPDR SP and SOFR

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

By analyzing existing cross correlation between SPDR SP 500 and SOFR, you can compare the effects of market volatilities on SPDR SP and SOFR 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 SPDR SP with a short position of SOFR. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and SOFR.

Diversification Opportunities for SPDR SP and SOFR

0.86

Correlation Coefficient

SPDR SP  SOFR

Very poor diversification

The 3 months correlation between SPDR and SOFR is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and SOFR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SOFR and SPDR SP 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 SPDR SP 500 are associated (or correlated) with SOFR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SOFR has no effect on the direction of SPDR SP i.e., SPDR SP and SOFR go up and down completely randomly.

Pair Corralation between SPDR SP and SOFR

Considering the 90-day investment horizon SPDR SP 500 is expected to generate 28.26 times more return on investment than SOFR. However, SPDR SP is 28.26 times more volatile than SOFR. It trades about 0.12 of its potential returns per unit of risk. SOFR is currently generating about 0.72 per unit of risk. If you would invest  37,161  in SPDR SP 500 on September 22, 2024 and sell it today you would earn a total of  21,954  from holding SPDR SP 500 or generate 59.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	55.85%
Values	Daily Returns

SPDR SP 500  vs.  SOFR

SPDR SP 500

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, SPDR SP is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

SOFR

Risk-Adjusted Performance

38 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in SOFR are ranked lower than 38 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical and fundamental indicators, SOFR is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with SPDR SP and SOFR

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

The idea behind SPDR SP 500 and SOFR 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.