Correlation Between Value Equity and Equity Index

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

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

Diversification Opportunities for Value Equity and Equity Index

0.98

Correlation Coefficient

Value Equity  Equity Index

Almost no diversification

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

Pair Corralation between Value Equity and Equity Index

Assuming the 90 days horizon Value Equity is expected to generate 1.09 times less return on investment than Equity Index. But when comparing it to its historical volatility, Value Equity Institutional is 1.09 times less risky than Equity Index. It trades about 0.19 of its potential returns per unit of risk. Equity Index Institutional is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  5,639  in Equity Index Institutional on September 2, 2024 and sell it today you would earn a total of  497.00  from holding Equity Index Institutional or generate 8.81% return on investment over 90 days.

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

Value Equity Institutional  vs.  Equity Index Institutional

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.

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.

Pair Trading with Value Equity and Equity Index

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

The idea behind Value Equity Institutional and Equity Index 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.

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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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.