Correlation Between California Bond and Investment Grade

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

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

Diversification Opportunities for California Bond and Investment Grade

0.54

Correlation Coefficient

California Bond  Investment Grade

Very weak diversification

The 3 months correlation between California and Investment is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and Investment Grade Porate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Grade Porate and California Bond 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 California Bond Fund are associated (or correlated) with Investment Grade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Grade Porate has no effect on the direction of California Bond i.e., California Bond and Investment Grade go up and down completely randomly.

Pair Corralation between California Bond and Investment Grade

Assuming the 90 days horizon California Bond Fund is expected to under-perform the Investment Grade. But the mutual fund apears to be less risky and, when comparing its historical volatility, California Bond Fund is 1.12 times less risky than Investment Grade. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Investment Grade Porate is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  882.00  in Investment Grade Porate on December 29, 2024 and sell it today you would earn a total of  17.00  from holding Investment Grade Porate or generate 1.93% return on investment over 90 days.

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

California Bond Fund  vs.  Investment Grade Porate

California Bond

Risk-Adjusted Performance

Very Weak

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

Investment Grade Porate

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Grade Porate are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Investment Grade is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Bond and Investment Grade

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

The idea behind California Bond Fund and Investment Grade Porate 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.