Correlation Between Equity Income and Diversified International

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

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

Diversification Opportunities for Equity Income and Diversified International

-0.41

Correlation Coefficient

Equity Income  Diversified International

Very good diversification

The 3 months correlation between Equity and Diversified is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Fund and Diversified International Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified International and Equity Income 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 Equity Income Fund are associated (or correlated) with Diversified International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified International has no effect on the direction of Equity Income i.e., Equity Income and Diversified International go up and down completely randomly.

Pair Corralation between Equity Income and Diversified International

Assuming the 90 days horizon Equity Income Fund is expected to generate 0.72 times more return on investment than Diversified International. However, Equity Income Fund is 1.38 times less risky than Diversified International. It trades about 0.2 of its potential returns per unit of risk. Diversified International Fund is currently generating about -0.04 per unit of risk. If you would invest  4,225  in Equity Income Fund on September 2, 2024 and sell it today you would earn a total of  347.00  from holding Equity Income Fund or generate 8.21% return on investment over 90 days.

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

Equity Income Fund  vs.  Diversified International Fund

Equity Income

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Diversified International

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Equity Income and Diversified International

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

The idea behind Equity Income Fund and Diversified International 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.