Correlation Between Intermediate-term and Extended Market

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

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

Diversification Opportunities for Intermediate-term and Extended Market

0.34

Correlation Coefficient

Intermediate-term  Extended Market

Weak diversification

The 3 months correlation between Intermediate-term and Extended is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Bond Fund and Extended Market Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extended Market Index and Intermediate-term 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 Intermediate Term Bond Fund are associated (or correlated) with Extended Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extended Market Index has no effect on the direction of Intermediate-term i.e., Intermediate-term and Extended Market go up and down completely randomly.

Pair Corralation between Intermediate-term and Extended Market

Assuming the 90 days horizon Intermediate-term is expected to generate 1.68 times less return on investment than Extended Market. But when comparing it to its historical volatility, Intermediate Term Bond Fund is 3.75 times less risky than Extended Market. It trades about 0.07 of its potential returns per unit of risk. Extended Market Index is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,869  in Extended Market Index on October 5, 2024 and sell it today you would earn a total of  211.00  from holding Extended Market Index or generate 11.29% return on investment over 90 days.

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

Intermediate Term Bond Fund  vs.  Extended Market Index

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.

Extended Market Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extended Market Index 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.

Pair Trading with Intermediate-term and Extended Market

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

The idea behind Intermediate Term Bond Fund and Extended Market Index 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.