Correlation Between California Bond and Ultra-short Term

Can any of the company-specific risk be diversified away by investing in both California Bond and Ultra-short 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 California Bond and Ultra-short Term 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 Ultra Short Term Fixed, you can compare the effects of market volatilities on California Bond and Ultra-short 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 California Bond with a short position of Ultra-short Term. Check out your portfolio center. Please also check ongoing floating volatility patterns of California Bond and Ultra-short Term.

Diversification Opportunities for California Bond and Ultra-short Term

-0.22

Correlation Coefficient

California Bond  Ultra-short Term

Very good diversification

The 3 months correlation between California and Ultra-short is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and Ultra Short Term Fixed in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra Short Term 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 Ultra-short Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra Short Term has no effect on the direction of California Bond i.e., California Bond and Ultra-short Term go up and down completely randomly.

Pair Corralation between California Bond and Ultra-short Term

Assuming the 90 days horizon California Bond is expected to generate 3.2 times less return on investment than Ultra-short Term. In addition to that, California Bond is 3.57 times more volatile than Ultra Short Term Fixed. It trades about 0.03 of its total potential returns per unit of risk. Ultra Short Term Fixed is currently generating about 0.32 per unit of volatility. If you would invest  929.00  in Ultra Short Term Fixed on October 7, 2024 and sell it today you would earn a total of  46.00  from holding Ultra Short Term Fixed or generate 4.95% return on investment over 90 days.

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

California Bond Fund  vs.  Ultra Short Term Fixed

California Bond

Risk-Adjusted Performance

0 of 100

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.

Ultra Short Term

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Short Term Fixed are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Ultra-short 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 California Bond and Ultra-short Term

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

The idea behind California Bond Fund and Ultra Short Term Fixed 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.