Correlation Between Growth Income and Growth Allocation

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

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

Diversification Opportunities for Growth Income and Growth Allocation

0.72

Correlation Coefficient

Growth Income  Growth Allocation

Poor diversification

The 3 months correlation between Growth and Growth is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Growth Income Fund and Growth Allocation Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Allocation and Growth Income 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 Income Fund are associated (or correlated) with Growth Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Allocation has no effect on the direction of Growth Income i.e., Growth Income and Growth Allocation go up and down completely randomly.

Pair Corralation between Growth Income and Growth Allocation

Assuming the 90 days horizon Growth Income Fund is expected to under-perform the Growth Allocation. In addition to that, Growth Income is 4.37 times more volatile than Growth Allocation Fund. It trades about -0.16 of its total potential returns per unit of risk. Growth Allocation Fund is currently generating about -0.22 per unit of volatility. If you would invest  1,333  in Growth Allocation Fund on October 7, 2024 and sell it today you would lose (70.00) from holding Growth Allocation Fund or give up 5.25% of portfolio value over 90 days.

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

Growth Income Fund  vs.  Growth Allocation Fund

Growth Income

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Growth Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Growth Allocation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Growth Allocation Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Growth Allocation 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 Income and Growth Allocation

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

The idea behind Growth Income Fund and Growth Allocation 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.