Correlation Between Morningstar Alternatives and Morningstar Defensive

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

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

Diversification Opportunities for Morningstar Alternatives and Morningstar Defensive

-0.15

Correlation Coefficient

Morningstar Alternatives  Morningstar Defensive

Good diversification

The 3 months correlation between Morningstar and Morningstar is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Alternatives and Morningstar Defensive Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Defensive and Morningstar Alternatives 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 Alternatives are associated (or correlated) with Morningstar Defensive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Defensive has no effect on the direction of Morningstar Alternatives i.e., Morningstar Alternatives and Morningstar Defensive go up and down completely randomly.

Pair Corralation between Morningstar Alternatives and Morningstar Defensive

Assuming the 90 days horizon Morningstar Alternatives is expected to generate 0.86 times more return on investment than Morningstar Defensive. However, Morningstar Alternatives is 1.16 times less risky than Morningstar Defensive. It trades about 0.19 of its potential returns per unit of risk. Morningstar Defensive Bond is currently generating about 0.04 per unit of risk. If you would invest  1,054  in Morningstar Alternatives on September 3, 2024 and sell it today you would earn a total of  15.00  from holding Morningstar Alternatives or generate 1.42% return on investment over 90 days.

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

Morningstar Alternatives  vs.  Morningstar Defensive Bond

Morningstar Alternatives

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Alternatives are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Morningstar Alternatives is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Morningstar Defensive

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Defensive Bond are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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.

Pair Trading with Morningstar Alternatives and Morningstar Defensive

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

The idea behind Morningstar Alternatives and Morningstar Defensive Bond 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.