Correlation Between Five Year and Class III

Can any of the company-specific risk be diversified away by investing in both Five Year and Class III 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 Five Year and Class III into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Five Year Treasury Note and Class III Milk, you can compare the effects of market volatilities on Five Year and Class III 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 Five Year with a short position of Class III. Check out your portfolio center. Please also check ongoing floating volatility patterns of Five Year and Class III.

Diversification Opportunities for Five Year and Class III

0.83

Correlation Coefficient

Five Year  Class III

Very poor diversification

The 3 months correlation between Five and Class is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Five Year Treasury Note and Class III Milk in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Class III Milk and Five Year 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 Five Year Treasury Note are associated (or correlated) with Class III. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Class III Milk has no effect on the direction of Five Year i.e., Five Year and Class III go up and down completely randomly.

Pair Corralation between Five Year and Class III

Assuming the 90 days horizon Five Year Treasury Note is expected to generate 0.09 times more return on investment than Class III. However, Five Year Treasury Note is 10.96 times less risky than Class III. It trades about -0.11 of its potential returns per unit of risk. Class III Milk is currently generating about -0.06 per unit of risk. If you would invest  10,887  in Five Year Treasury Note on August 30, 2024 and sell it today you would lose (170.00) from holding Five Year Treasury Note or give up 1.56% of portfolio value over 90 days.

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

Five Year Treasury Note  vs.  Class III Milk

Five Year Treasury

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Five Year Treasury Note has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Five Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Class III Milk

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Class III Milk has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Commodity's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for Class III Milk shareholders.

Pair Trading with Five Year and Class III

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

The idea behind Five Year Treasury Note and Class III Milk 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.