Correlation Between Value Equity and Medium Duration

Can any of the company-specific risk be diversified away by investing in both Value Equity and Medium Duration 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 Medium Duration 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 Medium Duration Bond Institutional, you can compare the effects of market volatilities on Value Equity and Medium Duration 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 Medium Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Equity and Medium Duration.

Diversification Opportunities for Value Equity and Medium Duration

-0.57

Correlation Coefficient

Value Equity  Medium Duration

Excellent diversification

The 3 months correlation between Value and Medium is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity Institutional and Medium Duration Bond Instituti in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Medium Duration Bond 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 Medium Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Medium Duration Bond has no effect on the direction of Value Equity i.e., Value Equity and Medium Duration go up and down completely randomly.

Pair Corralation between Value Equity and Medium Duration

Assuming the 90 days horizon Value Equity Institutional is expected to generate 4.27 times more return on investment than Medium Duration. However, Value Equity is 4.27 times more volatile than Medium Duration Bond Institutional. It trades about -0.03 of its potential returns per unit of risk. Medium Duration Bond Institutional is currently generating about -0.13 per unit of risk. If you would invest  2,005  in Value Equity Institutional on September 12, 2024 and sell it today you would lose (56.00) from holding Value Equity Institutional or give up 2.79% of portfolio value over 90 days.

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

Value Equity Institutional  vs.  Medium Duration Bond Instituti

Value Equity Institu

Risk-Adjusted Performance

0 of 100

Very Weak

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

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 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Value Equity and Medium Duration

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

The idea behind Value Equity Institutional and Medium Duration Bond 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.