Correlation Between Government Securities and Intermediate-term

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

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

Diversification Opportunities for Government Securities and Intermediate-term

0.95

Correlation Coefficient

Government Securities  Intermediate-term

Almost no diversification

The 3 months correlation between Government and Intermediate-term is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Government Securities Fund and Intermediate Term Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Intermediate Term Bond and Government Securities 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 Government Securities 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 Bond has no effect on the direction of Government Securities i.e., Government Securities and Intermediate-term go up and down completely randomly.

Pair Corralation between Government Securities and Intermediate-term

Assuming the 90 days horizon Government Securities Fund is expected to under-perform the Intermediate-term. But the mutual fund apears to be less risky and, when comparing its historical volatility, Government Securities Fund is 1.23 times less risky than Intermediate-term. The mutual fund trades about -0.11 of its potential returns per unit of risk. The Intermediate Term Bond Fund is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  914.00  in Intermediate Term Bond Fund on October 8, 2024 and sell it today you would lose (8.00) from holding Intermediate Term Bond Fund or give up 0.88% of portfolio value over 90 days.

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

Government Securities Fund  vs.  Intermediate Term Bond Fund

Government Securities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Intermediate Term Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Intermediate Term Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, 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 Government Securities and Intermediate-term

The main advantage of trading using opposite Government Securities and Intermediate-term positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Government Securities 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 Government Securities Fund and Intermediate Term Bond 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.