Correlation Between Morningstar Defensive and High Yield

Can any of the company-specific risk be diversified away by investing in both Morningstar Defensive and High Yield 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 High Yield 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 High Yield Fund, you can compare the effects of market volatilities on Morningstar Defensive and High Yield 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 High Yield. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Defensive and High Yield.

Diversification Opportunities for Morningstar Defensive and High Yield

0.18

Correlation Coefficient

Morningstar Defensive  High Yield

Average diversification

The 3 months correlation between Morningstar and High is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and High Yield Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on High Yield Fund 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 High Yield. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of High Yield Fund has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and High Yield go up and down completely randomly.

Pair Corralation between Morningstar Defensive and High Yield

Assuming the 90 days horizon Morningstar Defensive Bond is expected to under-perform the High Yield. But the mutual fund apears to be less risky and, when comparing its historical volatility, Morningstar Defensive Bond is 1.2 times less risky than High Yield. The mutual fund trades about -0.02 of its potential returns per unit of risk. The High Yield Fund is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  803.00  in High Yield Fund on September 12, 2024 and sell it today you would earn a total of  9.00  from holding High Yield Fund or generate 1.12% return on investment over 90 days.

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

Morningstar Defensive Bond  vs.  High Yield Fund

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.

High Yield Fund

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in High Yield Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, High Yield 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 High Yield

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

The idea behind Morningstar Defensive Bond and High Yield Fund 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.