Correlation Between Short-term Government and Short Duration

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

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

Diversification Opportunities for Short-term Government and Short Duration

0.96

Correlation Coefficient

Short-term Government  Short Duration

Almost no diversification

The 3 months correlation between Short-term and Short is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Short Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration and Short-term Government 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 Term Government Fund are associated (or correlated) with Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration has no effect on the direction of Short-term Government i.e., Short-term Government and Short Duration go up and down completely randomly.

Pair Corralation between Short-term Government and Short Duration

Assuming the 90 days horizon Short-term Government is expected to generate 1.37 times less return on investment than Short Duration. But when comparing it to its historical volatility, Short Term Government Fund is 1.09 times less risky than Short Duration. It trades about 0.17 of its potential returns per unit of risk. Short Duration Fund is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  965.00  in Short Duration Fund on December 25, 2024 and sell it today you would earn a total of  15.00  from holding Short Duration Fund or generate 1.55% return on investment over 90 days.

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

Short Term Government Fund  vs.  Short Duration Fund

Short Term Government

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Short-term Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Short Duration

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Short Duration Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short-term Government and Short Duration

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

The idea behind Short Term Government Fund and Short Duration Fund 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.