Correlation Between Low Duration and Real Return

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

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

Diversification Opportunities for Low Duration and Real Return

0.92

Correlation Coefficient

Low Duration  Real Return

Almost no diversification

The 3 months correlation between Low and Real is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Low Duration Fund and Real Return Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Return Fund and Low Duration 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 Low Duration Fund are associated (or correlated) with Real Return. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Return Fund has no effect on the direction of Low Duration i.e., Low Duration and Real Return go up and down completely randomly.

Pair Corralation between Low Duration and Real Return

Assuming the 90 days horizon Low Duration is expected to generate 3.37 times less return on investment than Real Return. But when comparing it to its historical volatility, Low Duration Fund is 3.12 times less risky than Real Return. It trades about 0.22 of its potential returns per unit of risk. Real Return Fund is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  1,003  in Real Return Fund on September 14, 2024 and sell it today you would earn a total of  11.00  from holding Real Return Fund or generate 1.1% return on investment over 90 days.

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

Low Duration Fund  vs.  Real Return Fund

Low Duration

Risk-Adjusted Performance

0 of 100

Very Weak

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

Real Return Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Low Duration and Real Return

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

The idea behind Low Duration Fund and Real Return 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.