Correlation Between Inflation Linked and Ultra Short

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

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

Diversification Opportunities for Inflation Linked and Ultra Short

-0.67

Correlation Coefficient

Inflation Linked  Ultra Short

Excellent diversification

The 3 months correlation between Inflation and Ultra is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Inflation Linked Fixed Income and Ultra Short Term Fixed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra Short Term and Inflation Linked 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 Inflation Linked Fixed Income are associated (or correlated) with Ultra Short. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra Short Term has no effect on the direction of Inflation Linked i.e., Inflation Linked and Ultra Short go up and down completely randomly.

Pair Corralation between Inflation Linked and Ultra Short

Assuming the 90 days horizon Inflation Linked is expected to generate 1.97 times less return on investment than Ultra Short. In addition to that, Inflation Linked is 6.86 times more volatile than Ultra Short Term Fixed. It trades about 0.04 of its total potential returns per unit of risk. Ultra Short Term Fixed is currently generating about 0.52 per unit of volatility. If you would invest  923.00  in Ultra Short Term Fixed on October 24, 2024 and sell it today you would earn a total of  54.00  from holding Ultra Short Term Fixed or generate 5.85% return on investment over 90 days.

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

Inflation Linked Fixed Income  vs.  Ultra Short Term Fixed

Inflation Linked Fixed

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inflation Linked Fixed Income has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Inflation Linked is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Ultra Short Term

Risk-Adjusted Performance

41 of 100

Excellent

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Short Term Fixed are ranked lower than 41 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Ultra 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 Inflation Linked and Ultra Short

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

The idea behind Inflation Linked Fixed Income and Ultra Short Term Fixed 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.