Correlation Between Short-term Government and Intermediate Term

Can any of the company-specific risk be diversified away by investing in both Short-term Government and Intermediate Term 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 Intermediate Term 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 Intermediate Term Tax Free Bond, you can compare the effects of market volatilities on Short-term Government and Intermediate Term 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 Intermediate Term. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Intermediate Term.

Diversification Opportunities for Short-term Government and Intermediate Term

0.78

Correlation Coefficient

Short-term Government  Intermediate Term

Poor diversification

The 3 months correlation between Short-term and Intermediate is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Intermediate Term Tax Free Bon in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Intermediate Term Tax 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 Intermediate Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Intermediate Term Tax has no effect on the direction of Short-term Government i.e., Short-term Government and Intermediate Term go up and down completely randomly.

Pair Corralation between Short-term Government and Intermediate Term

Assuming the 90 days horizon Short Term Government Fund is expected to under-perform the Intermediate Term. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Term Government Fund is 1.85 times less risky than Intermediate Term. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Intermediate Term Tax Free Bond is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,080  in Intermediate Term Tax Free Bond on September 2, 2024 and sell it today you would earn a total of  4.00  from holding Intermediate Term Tax Free Bond or generate 0.37% return on investment over 90 days.

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

Short Term Government Fund  vs.  Intermediate Term Tax Free Bon

Short Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Term Government Fund has generated negative risk-adjusted returns adding no value to fund investors. 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.

Intermediate Term Tax

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Term Tax Free Bond are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Intermediate Term 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 Intermediate Term

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

The idea behind Short Term Government Fund and Intermediate Term Tax Free Bond 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.