Correlation Between Morningstar Defensive and Defensive Market

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

By analyzing existing cross correlation between Morningstar Defensive Bond and Defensive Market Strategies, you can compare the effects of market volatilities on Morningstar Defensive and Defensive 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 Morningstar Defensive with a short position of Defensive Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Defensive and Defensive Market.

Diversification Opportunities for Morningstar Defensive and Defensive Market

-0.35

Correlation Coefficient

Morningstar Defensive  Defensive Market

Very good diversification

The 3 months correlation between Morningstar and Defensive is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and Defensive Market Strategies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defensive Market Str and Morningstar Defensive 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 Morningstar Defensive Bond are associated (or correlated) with Defensive Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defensive Market Str has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and Defensive Market go up and down completely randomly.

Pair Corralation between Morningstar Defensive and Defensive Market

Assuming the 90 days horizon Morningstar Defensive Bond is expected to generate 0.15 times more return on investment than Defensive Market. However, Morningstar Defensive Bond is 6.63 times less risky than Defensive Market. It trades about -0.07 of its potential returns per unit of risk. Defensive Market Strategies is currently generating about -0.04 per unit of risk. If you would invest  980.00  in Morningstar Defensive Bond on September 14, 2024 and sell it today you would lose (6.00) from holding Morningstar Defensive Bond or give up 0.61% of portfolio value over 90 days.

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

Morningstar Defensive Bond  vs.  Defensive Market Strategies

Morningstar Defensive

Risk-Adjusted Performance

0 of 100

Very Weak

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

Defensive Market Str

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Morningstar Defensive and Defensive Market

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

The idea behind Morningstar Defensive Bond and Defensive Market Strategies 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.