Correlation Between Extended Market and Income Stock

Can any of the company-specific risk be diversified away by investing in both Extended Market 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 Extended Market and Income Stock 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 Income Stock Fund, you can compare the effects of market volatilities on Extended Market 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 Extended Market with a short position of Income Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Extended Market and Income Stock.

Diversification Opportunities for Extended Market and Income Stock

0.43

Correlation Coefficient

Extended Market  Income Stock

Very weak diversification

The 3 months correlation between Extended and Income is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Extended Market Index and Income Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Income Stock 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 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 Extended Market i.e., Extended Market and Income Stock go up and down completely randomly.

Pair Corralation between Extended Market and Income Stock

Assuming the 90 days horizon Extended Market Index is expected to under-perform the Income Stock. In addition to that, Extended Market is 1.52 times more volatile than Income Stock Fund. It trades about -0.08 of its total potential returns per unit of risk. Income Stock Fund is currently generating about 0.06 per unit of volatility. If you would invest  1,749  in Income Stock Fund on December 29, 2024 and sell it today you would earn a total of  46.00  from holding Income Stock Fund or generate 2.63% return on investment over 90 days.

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

Extended Market Index  vs.  Income Stock Fund

Extended Market Index

Risk-Adjusted Performance

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 fairly strong forward indicators, Extended Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Income Stock

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Income Stock Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Income Stock 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 Income Stock

The main advantage of trading using opposite Extended Market and Income Stock positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Extended Market 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 Extended Market Index 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.