Correlation Between Growth Fund and Income Growth

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

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

Diversification Opportunities for Growth Fund and Income Growth

0.29

Correlation Coefficient

Growth Fund  Income Growth

Modest diversification

The 3 months correlation between Growth and Income is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Growth Fund I and Income Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Growth and Growth 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 Growth Fund I are associated (or correlated) with Income Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Income Growth has no effect on the direction of Growth Fund i.e., Growth Fund and Income Growth go up and down completely randomly.

Pair Corralation between Growth Fund and Income Growth

Assuming the 90 days horizon Growth Fund I is expected to generate 1.49 times more return on investment than Income Growth. However, Growth Fund is 1.49 times more volatile than Income Growth Fund. It trades about 0.08 of its potential returns per unit of risk. Income Growth Fund is currently generating about 0.08 per unit of risk. If you would invest  3,870  in Growth Fund I on December 2, 2024 and sell it today you would earn a total of  2,019  from holding Growth Fund I or generate 52.17% return on investment over 90 days.

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

Growth Fund I  vs.  Income Growth Fund

Growth Fund I

Risk-Adjusted Performance

Very Weak

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

Income Growth

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Growth Fund and Income Growth

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

The idea behind Growth Fund I and Income Growth 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.

Check out your portfolio center.

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.