Correlation Between Long Term and Moderate Duration

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

By analyzing existing cross correlation between Long Term Government Fund and Moderate Duration Fund, you can compare the effects of market volatilities on Long Term and Moderate 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 Long Term with a short position of Moderate Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of Long Term and Moderate Duration.

Diversification Opportunities for Long Term and Moderate Duration

0.97

Correlation Coefficient

Long Term  Moderate Duration

Almost no diversification

The 3 months correlation between Long and Moderate is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Long Term Government Fund and Moderate Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Duration and Long Term 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 Long Term Government Fund are associated (or correlated) with Moderate Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Duration has no effect on the direction of Long Term i.e., Long Term and Moderate Duration go up and down completely randomly.

Pair Corralation between Long Term and Moderate Duration

Assuming the 90 days horizon Long Term Government Fund is expected to under-perform the Moderate Duration. In addition to that, Long Term is 4.36 times more volatile than Moderate Duration Fund. It trades about -0.17 of its total potential returns per unit of risk. Moderate Duration Fund is currently generating about -0.14 per unit of volatility. If you would invest  937.00  in Moderate Duration Fund on September 17, 2024 and sell it today you would lose (15.00) from holding Moderate Duration Fund or give up 1.6% of portfolio value over 90 days.

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

Long Term Government Fund  vs.  Moderate Duration Fund

Long Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Long Term Government Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Moderate Duration

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Moderate Duration Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Moderate 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 Long Term and Moderate Duration

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

The idea behind Long Term Government Fund and Moderate Duration 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.