Correlation Between Medium-duration Bond and Value Equity

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

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

Diversification Opportunities for Medium-duration Bond and Value Equity

-0.72

Correlation Coefficient

Medium-duration Bond  Value Equity

Pay attention - limited upside

The 3 months correlation between Medium-duration and Value is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Medium Duration Bond Instituti and Value Equity Institutional in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Value Equity Institu and Medium-duration Bond 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 Medium Duration Bond 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 Institu has no effect on the direction of Medium-duration Bond i.e., Medium-duration Bond and Value Equity go up and down completely randomly.

Pair Corralation between Medium-duration Bond and Value Equity

Assuming the 90 days horizon Medium-duration Bond is expected to generate 6.05 times less return on investment than Value Equity. But when comparing it to its historical volatility, Medium Duration Bond Institutional is 2.15 times less risky than Value Equity. It trades about 0.12 of its potential returns per unit of risk. Value Equity Institutional is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  2,067  in Value Equity Institutional on September 4, 2024 and sell it today you would earn a total of  111.00  from holding Value Equity Institutional or generate 5.37% return on investment over 90 days.

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

Medium Duration Bond Instituti  vs.  Value Equity Institutional

Medium Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Medium Duration Bond Institutional has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Medium-duration Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Value Equity Institu

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity 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, Value Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Medium-duration Bond and Value Equity

The main advantage of trading using opposite Medium-duration Bond and Value Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Medium-duration Bond 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 Medium Duration Bond Institutional and Value Equity Institutional 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.