Correlation Between Ultra-short Fixed and The Short

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

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

Diversification Opportunities for Ultra-short Fixed and The Short

-0.18

Correlation Coefficient

Ultra-short Fixed  The Short

Good diversification

The 3 months correlation between Ultra-short and The is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Short Fixed Income and The Short Term in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term and Ultra-short Fixed 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 Ultra Short Fixed Income are associated (or correlated) with The Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term has no effect on the direction of Ultra-short Fixed i.e., Ultra-short Fixed and The Short go up and down completely randomly.

Pair Corralation between Ultra-short Fixed and The Short

Assuming the 90 days horizon Ultra Short Fixed Income is expected to generate 0.84 times more return on investment than The Short. However, Ultra Short Fixed Income is 1.19 times less risky than The Short. It trades about 0.13 of its potential returns per unit of risk. The Short Term is currently generating about 0.05 per unit of risk. If you would invest  1,024  in Ultra Short Fixed Income on August 31, 2024 and sell it today you would earn a total of  7.00  from holding Ultra Short Fixed Income or generate 0.68% return on investment over 90 days.

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

Ultra Short Fixed Income  vs.  The Short Term

Ultra Short Fixed

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Short Fixed Income are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Ultra-short Fixed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Term

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Short Term are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, The Short is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Ultra-short Fixed and The Short

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

The idea behind Ultra Short Fixed Income and The Short Term 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.