Correlation Between Real Return and Long Term

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

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

Diversification Opportunities for Real Return and Long Term

0.98

Correlation Coefficient

Real Return  Long Term

Almost no diversification

The 3 months correlation between Real and Long is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Real Return Asset and Long Term Government Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Long Term Government and Real Return 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 Real Return Asset are associated (or correlated) with Long Term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Long Term Government has no effect on the direction of Real Return i.e., Real Return and Long Term go up and down completely randomly.

Pair Corralation between Real Return and Long Term

Assuming the 90 days horizon Real Return Asset is expected to generate 1.0 times more return on investment than Long Term. However, Real Return is 1.0 times more volatile than Long Term Government Fund. It trades about -0.17 of its potential returns per unit of risk. Long Term Government Fund is currently generating about -0.18 per unit of risk. If you would invest  1,306  in Real Return Asset on September 16, 2024 and sell it today you would lose (111.00) from holding Real Return Asset or give up 8.5% of portfolio value over 90 days.

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

Real Return Asset  vs.  Long Term Government Fund

Real Return Asset

Risk-Adjusted Performance

0 of 100

Very Weak

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

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.

Pair Trading with Real Return and Long Term

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

The idea behind Real Return Asset and Long Term Government 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.