Correlation Between Value Fund and Short Duration

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

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

Diversification Opportunities for Value Fund and Short Duration

0.7

Correlation Coefficient

Value Fund  Short Duration

Poor diversification

The 3 months correlation between Value and Short is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund A and Short Duration Inflation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration Inflation and Value Fund 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 Value Fund A 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 Inflation has no effect on the direction of Value Fund i.e., Value Fund and Short Duration go up and down completely randomly.

Pair Corralation between Value Fund and Short Duration

Assuming the 90 days horizon Value Fund A is expected to under-perform the Short Duration. In addition to that, Value Fund is 4.04 times more volatile than Short Duration Inflation. It trades about -0.18 of its total potential returns per unit of risk. Short Duration Inflation is currently generating about -0.16 per unit of volatility. If you would invest  1,043  in Short Duration Inflation on September 22, 2024 and sell it today you would lose (27.00) from holding Short Duration Inflation or give up 2.59% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.73%
Values	Daily Returns

Value Fund A  vs.  Short Duration Inflation

Value Fund A

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Value Fund A has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Short Duration Inflation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Duration Inflation has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward 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 Value Fund and Short Duration

The main advantage of trading using opposite Value Fund and Short Duration positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Fund 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 Value Fund A and Short Duration Inflation 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 Anywhere module to track or share privately all of your investments from the convenience of any device.