Correlation Between Equity Index and Value Equity

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

By analyzing existing cross correlation between Equity Index Institutional and Value Equity Investor, you can compare the effects of market volatilities on Equity Index and Value Equity 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 Equity Index with a short position of Value Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Index and Value Equity.

Diversification Opportunities for Equity Index and Value Equity

0.98

Correlation Coefficient

Equity Index  Value Equity

Almost no diversification

The 3 months correlation between Equity and Value is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Institutional and Value Equity Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Value Equity Investor and Equity Index 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 Equity Index Institutional are associated (or correlated) with Value Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Value Equity Investor has no effect on the direction of Equity Index i.e., Equity Index and Value Equity go up and down completely randomly.

Pair Corralation between Equity Index and Value Equity

Assuming the 90 days horizon Equity Index is expected to generate 1.0 times less return on investment than Value Equity. But when comparing it to its historical volatility, Equity Index Institutional is 1.04 times less risky than Value Equity. It trades about 0.33 of its potential returns per unit of risk. Value Equity Investor is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  2,065  in Value Equity Investor on September 2, 2024 and sell it today you would earn a total of  111.00  from holding Value Equity Investor or generate 5.38% return on investment over 90 days.

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

Equity Index Institutional  vs.  Value Equity Investor

Equity Index Institu

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Index Institutional are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Equity Index may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Value Equity Investor

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity Investor are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Value Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Equity Index and Value Equity

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

The idea behind Equity Index Institutional and Value Equity Investor 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.