Correlation Between SPDR SP and US Treasury

Can any of the company-specific risk be diversified away by investing in both SPDR SP and US Treasury 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 US Treasury 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 US Treasury 7, you can compare the effects of market volatilities on SPDR SP and US Treasury 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 US Treasury. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and US Treasury.

Diversification Opportunities for SPDR SP and US Treasury

-0.08

Correlation Coefficient

SPDR SP  US Treasury

Good diversification

The 3 months correlation between SPDR and USVN is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and US Treasury 7 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Treasury 7 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 US Treasury. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Treasury 7 has no effect on the direction of SPDR SP i.e., SPDR SP and US Treasury go up and down completely randomly.

Pair Corralation between SPDR SP and US Treasury

Considering the 90-day investment horizon SPDR SP 500 is expected to generate 3.51 times more return on investment than US Treasury. However, SPDR SP is 3.51 times more volatile than US Treasury 7. It trades about -0.09 of its potential returns per unit of risk. US Treasury 7 is currently generating about -0.37 per unit of risk. If you would invest  60,078  in SPDR SP 500 on October 11, 2024 and sell it today you would lose (1,129) from holding SPDR SP 500 or give up 1.88% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

SPDR SP 500  vs.  US Treasury 7

SPDR SP 500

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 3 (%) 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 latest stock price disturbance, may contribute to short-term losses for the investors.

US Treasury 7

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days US Treasury 7 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, US Treasury is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with SPDR SP and US Treasury

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

The idea behind SPDR SP 500 and US Treasury 7 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.