Correlation Between Quantitative and Total Market

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

By analyzing existing cross correlation between Quantitative U S and Total Market Portfolio, you can compare the effects of market volatilities on Quantitative and Total Market 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 Quantitative with a short position of Total Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Quantitative and Total Market.

Diversification Opportunities for Quantitative and Total Market

0.97

Correlation Coefficient

Quantitative  Total Market

Almost no diversification

The 3 months correlation between Quantitative and Total is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Quantitative U S and Total Market Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Total Market Portfolio and Quantitative 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 Quantitative U S are associated (or correlated) with Total Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Total Market Portfolio has no effect on the direction of Quantitative i.e., Quantitative and Total Market go up and down completely randomly.

Pair Corralation between Quantitative and Total Market

Assuming the 90 days horizon Quantitative is expected to generate 1.48 times less return on investment than Total Market. But when comparing it to its historical volatility, Quantitative U S is 1.3 times less risky than Total Market. It trades about 0.15 of its potential returns per unit of risk. Total Market Portfolio is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,973  in Total Market Portfolio on August 31, 2024 and sell it today you would earn a total of  205.00  from holding Total Market Portfolio or generate 10.39% return on investment over 90 days.

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

Quantitative U S  vs.  Total Market Portfolio

Quantitative U S

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Quantitative U S are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Quantitative may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Total Market Portfolio

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Total Market Portfolio are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Total Market may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Quantitative and Total Market

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

The idea behind Quantitative U S and Total Market Portfolio 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.