Correlation Between Growth Fund and Income Stock

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

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

Diversification Opportunities for Growth Fund and Income Stock

0.89

Correlation Coefficient

Growth Fund  Income Stock

Very poor diversification

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

Pair Corralation between Growth Fund and Income Stock

Assuming the 90 days horizon Growth Fund Growth is expected to under-perform the Income Stock. In addition to that, Growth Fund is 2.17 times more volatile than Income Stock Fund. It trades about -0.24 of its total potential returns per unit of risk. Income Stock Fund is currently generating about 0.07 per unit of volatility. If you would invest  1,823  in Income Stock Fund on December 4, 2024 and sell it today you would earn a total of  14.00  from holding Income Stock Fund or generate 0.77% return on investment over 90 days.

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

Growth Fund Growth  vs.  Income Stock Fund

Growth Fund Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Growth Fund Growth 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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Income Stock

Risk-Adjusted Performance

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 April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Growth Fund and Income Stock

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

The idea behind Growth Fund Growth and Income Stock 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.