Correlation Between Extended Market and Prudential Qma

Can any of the company-specific risk be diversified away by investing in both Extended Market and Prudential Qma 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 Prudential Qma 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 Prudential Qma Strategic, you can compare the effects of market volatilities on Extended Market and Prudential Qma 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 Prudential Qma. Check out your portfolio center. Please also check ongoing floating volatility patterns of Extended Market and Prudential Qma.

Diversification Opportunities for Extended Market and Prudential Qma

0.86

Correlation Coefficient

Extended Market  Prudential Qma

Very poor diversification

The 3 months correlation between Extended and Prudential is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and Prudential Qma Strategic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Qma Strategic 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 Prudential Qma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Qma Strategic has no effect on the direction of Extended Market i.e., Extended Market and Prudential Qma go up and down completely randomly.

Pair Corralation between Extended Market and Prudential Qma

Assuming the 90 days horizon Extended Market Index is expected to generate 1.04 times more return on investment than Prudential Qma. However, Extended Market is 1.04 times more volatile than Prudential Qma Strategic. It trades about -0.05 of its potential returns per unit of risk. Prudential Qma Strategic is currently generating about -0.06 per unit of risk. If you would invest  2,274  in Extended Market Index on October 24, 2024 and sell it today you would lose (168.00) from holding Extended Market Index or give up 7.39% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.78%
Values	Daily Returns

Extended Market Index  vs.  Prudential Qma Strategic

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.

Prudential Qma Strategic

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prudential Qma Strategic has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Extended Market and Prudential Qma

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

The idea behind Extended Market Index and Prudential Qma Strategic 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.