Correlation Between Extended Market and Real Estate

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

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

Diversification Opportunities for Extended Market and Real Estate

0.87

Correlation Coefficient

Extended Market  Real Estate

Very poor diversification

The 3 months correlation between Extended and Real is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and Real Estate Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Estate Fund and Extended Market 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 Extended Market Index are associated (or correlated) with Real Estate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Estate Fund has no effect on the direction of Extended Market i.e., Extended Market and Real Estate go up and down completely randomly.

Pair Corralation between Extended Market and Real Estate

Assuming the 90 days horizon Extended Market Index is expected to generate 1.14 times more return on investment than Real Estate. However, Extended Market is 1.14 times more volatile than Real Estate Fund. It trades about 0.03 of its potential returns per unit of risk. Real Estate Fund is currently generating about 0.02 per unit of risk. If you would invest  1,794  in Extended Market Index on October 11, 2024 and sell it today you would earn a total of  271.00  from holding Extended Market Index or generate 15.11% return on investment over 90 days.

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

Extended Market Index  vs.  Real Estate Fund

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.

Real Estate Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Extended Market and Real Estate

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

The idea behind Extended Market Index and Real Estate 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.