Correlation Between Ultra Short and Fixed Income

Can any of the company-specific risk be diversified away by investing in both Ultra Short and Fixed 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 Ultra Short and Fixed Income 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 Fixed Income, you can compare the effects of market volatilities on Ultra Short and Fixed 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 Ultra Short with a short position of Fixed Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ultra Short and Fixed Income.

Diversification Opportunities for Ultra Short and Fixed Income

-0.11

Correlation Coefficient

Ultra Short  Fixed Income

Good diversification

The 3 months correlation between Ultra and Fixed is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Short Fixed Income and The Fixed Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fixed Income and Ultra Short 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 Fixed Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fixed Income has no effect on the direction of Ultra Short i.e., Ultra Short and Fixed Income go up and down completely randomly.

Pair Corralation between Ultra Short and Fixed Income

Assuming the 90 days horizon Ultra Short is expected to generate 1.41 times less return on investment than Fixed Income. But when comparing it to its historical volatility, Ultra Short Fixed Income is 3.11 times less risky than Fixed Income. It trades about 0.12 of its potential returns per unit of risk. The Fixed Income is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  739.00  in The Fixed Income on September 13, 2024 and sell it today you would earn a total of  6.00  from holding The Fixed Income or generate 0.81% 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 Fixed Income

Ultra Short Fixed

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Short Fixed Income are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Ultra Short is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Fixed Income

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Fixed Income are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Fixed 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 Ultra Short and Fixed Income

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

The idea behind Ultra Short Fixed Income and The Fixed Income 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..