Correlation Between IShares Convertible and IShares Fundamental

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

By analyzing existing cross correlation between iShares Convertible Bond and iShares Fundamental Hedged, you can compare the effects of market volatilities on IShares Convertible and IShares Fundamental 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 IShares Convertible with a short position of IShares Fundamental. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Convertible and IShares Fundamental.

Diversification Opportunities for IShares Convertible and IShares Fundamental

0.63

Correlation Coefficient

IShares Convertible  IShares Fundamental

Poor diversification

The 3 months correlation between IShares and IShares is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding iShares Convertible Bond and iShares Fundamental Hedged in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Fundamental and IShares Convertible 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 iShares Convertible Bond are associated (or correlated) with IShares Fundamental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Fundamental has no effect on the direction of IShares Convertible i.e., IShares Convertible and IShares Fundamental go up and down completely randomly.

Pair Corralation between IShares Convertible and IShares Fundamental

Assuming the 90 days trading horizon IShares Convertible is expected to generate 3.71 times less return on investment than IShares Fundamental. But when comparing it to its historical volatility, iShares Convertible Bond is 1.39 times less risky than IShares Fundamental. It trades about 0.07 of its potential returns per unit of risk. iShares Fundamental Hedged is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  5,281  in iShares Fundamental Hedged on September 5, 2024 and sell it today you would earn a total of  433.00  from holding iShares Fundamental Hedged or generate 8.2% return on investment over 90 days.

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

iShares Convertible Bond  vs.  iShares Fundamental Hedged

iShares Convertible Bond

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Convertible Bond are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, IShares Convertible is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

iShares Fundamental

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Fundamental Hedged are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, IShares Fundamental may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares Convertible and IShares Fundamental

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

The idea behind iShares Convertible Bond and iShares Fundamental Hedged 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.