Correlation Between International Equity and Inflation Protection

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

By analyzing existing cross correlation between International Equity Index and Inflation Protection Fund, you can compare the effects of market volatilities on International Equity and Inflation Protection 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 International Equity with a short position of Inflation Protection. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Inflation Protection.

Diversification Opportunities for International Equity and Inflation Protection

0.83

Correlation Coefficient

International Equity  Inflation Protection

Very poor diversification

The 3 months correlation between International and Inflation is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Index and Inflation Protection Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inflation Protection and International 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 International Equity Index are associated (or correlated) with Inflation Protection. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inflation Protection has no effect on the direction of International Equity i.e., International Equity and Inflation Protection go up and down completely randomly.

Pair Corralation between International Equity and Inflation Protection

Assuming the 90 days horizon International Equity Index is expected to under-perform the Inflation Protection. In addition to that, International Equity is 3.19 times more volatile than Inflation Protection Fund. It trades about -0.06 of its total potential returns per unit of risk. Inflation Protection Fund is currently generating about -0.01 per unit of volatility. If you would invest  794.00  in Inflation Protection Fund on September 2, 2024 and sell it today you would lose (2.00) from holding Inflation Protection Fund or give up 0.25% of portfolio value over 90 days.

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

International Equity Index  vs.  Inflation Protection Fund

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Inflation Protection

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with International Equity and Inflation Protection

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

The idea behind International Equity Index and Inflation Protection 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.

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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.