Correlation Between Balanced Strategy and Multifactor Equity

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

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

Diversification Opportunities for Balanced Strategy and Multifactor Equity

0.72

Correlation Coefficient

Balanced Strategy  Multifactor Equity

Poor diversification

The 3 months correlation between Balanced and Multifactor is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Balanced Strategy Fund and Multifactor Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Multifactor Equity and Balanced Strategy 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 Balanced Strategy Fund 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 Balanced Strategy i.e., Balanced Strategy and Multifactor Equity go up and down completely randomly.

Pair Corralation between Balanced Strategy and Multifactor Equity

Assuming the 90 days horizon Balanced Strategy is expected to generate 3.09 times less return on investment than Multifactor Equity. But when comparing it to its historical volatility, Balanced Strategy Fund is 1.72 times less risky than Multifactor Equity. It trades about 0.13 of its potential returns per unit of risk. Multifactor Equity Fund is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1,855  in Multifactor Equity Fund on September 4, 2024 and sell it today you would earn a total of  206.00  from holding Multifactor Equity Fund or generate 11.11% return on investment over 90 days.

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

Balanced Strategy Fund  vs.  Multifactor Equity Fund

Balanced Strategy

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Strategy Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Balanced Strategy 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

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Multifactor Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Balanced Strategy and Multifactor Equity

The main advantage of trading using opposite Balanced Strategy and Multifactor Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Balanced Strategy 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 Balanced Strategy Fund 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.

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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.