Correlation Between Versatile Bond and Multifactor Equity

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

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

Diversification Opportunities for Versatile Bond and Multifactor Equity

0.33

Correlation Coefficient

Versatile Bond  Multifactor Equity

Weak diversification

The 3 months correlation between Versatile and Multifactor is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding Versatile Bond Portfolio and Multifactor Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Multifactor Equity and Versatile Bond 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 Versatile Bond Portfolio are associated (or correlated) with Multifactor Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Multifactor Equity has no effect on the direction of Versatile Bond i.e., Versatile Bond and Multifactor Equity go up and down completely randomly.

Pair Corralation between Versatile Bond and Multifactor Equity

Assuming the 90 days horizon Versatile Bond Portfolio is expected to generate 0.03 times more return on investment than Multifactor Equity. However, Versatile Bond Portfolio is 29.03 times less risky than Multifactor Equity. It trades about -0.09 of its potential returns per unit of risk. Multifactor Equity Fund is currently generating about -0.09 per unit of risk. If you would invest  6,429  in Versatile Bond Portfolio on September 24, 2024 and sell it today you would lose (42.00) from holding Versatile Bond Portfolio or give up 0.65% of portfolio value over 90 days.

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

Versatile Bond Portfolio  vs.  Multifactor Equity Fund

Versatile Bond Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

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

Multifactor Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Multifactor Equity Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Versatile Bond and Multifactor Equity

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

The idea behind Versatile Bond Portfolio and Multifactor Equity 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.