Correlation Between Income Stock and World Growth

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

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

Diversification Opportunities for Income Stock and World Growth

0.89

Correlation Coefficient

Income Stock  World Growth

Very poor diversification

The 3 months correlation between Income and World is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Income Stock Fund and World Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on World Growth and Income Stock 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 Income Stock Fund are associated (or correlated) with World Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of World Growth has no effect on the direction of Income Stock i.e., Income Stock and World Growth go up and down completely randomly.

Pair Corralation between Income Stock and World Growth

Assuming the 90 days horizon Income Stock Fund is expected to under-perform the World Growth. In addition to that, Income Stock is 1.44 times more volatile than World Growth Fund. It trades about -0.04 of its total potential returns per unit of risk. World Growth Fund is currently generating about 0.03 per unit of volatility. If you would invest  2,863  in World Growth Fund on September 24, 2024 and sell it today you would earn a total of  115.00  from holding World Growth Fund or generate 4.02% return on investment over 90 days.

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

Income Stock Fund  vs.  World Growth Fund

Income Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Income Stock 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 basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

World Growth

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Income Stock and World Growth

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

The idea behind Income Stock Fund and World 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.

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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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.