Correlation Between Short Real and Rational Defensive

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

By analyzing existing cross correlation between Short Real Estate and Rational Defensive Growth, you can compare the effects of market volatilities on Short Real and Rational Defensive 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 Real with a short position of Rational Defensive. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Real and Rational Defensive.

Diversification Opportunities for Short Real and Rational Defensive

0.45

Correlation Coefficient

Short Real  Rational Defensive

Very weak diversification

The 3 months correlation between Short and Rational is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Short Real Estate and Rational Defensive Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rational Defensive Growth and Short Real 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 Real Estate are associated (or correlated) with Rational Defensive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rational Defensive Growth has no effect on the direction of Short Real i.e., Short Real and Rational Defensive go up and down completely randomly.

Pair Corralation between Short Real and Rational Defensive

Assuming the 90 days horizon Short Real Estate is expected to under-perform the Rational Defensive. In addition to that, Short Real is 1.06 times more volatile than Rational Defensive Growth. It trades about -0.01 of its total potential returns per unit of risk. Rational Defensive Growth is currently generating about 0.12 per unit of volatility. If you would invest  2,243  in Rational Defensive Growth on September 26, 2024 and sell it today you would earn a total of  1,800  from holding Rational Defensive Growth or generate 80.25% return on investment over 90 days.

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

Short Real Estate  vs.  Rational Defensive Growth

Short Real Estate

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Short Real Estate are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Short Real may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Rational Defensive Growth

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rational Defensive Growth are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Rational Defensive may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Short Real and Rational Defensive

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

The idea behind Short Real Estate and Rational Defensive Growth 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.