Correlation Between Capital World and International Government

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

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

Diversification Opportunities for Capital World and International Government

0.96

Correlation Coefficient

Capital World  International Government

Almost no diversification

The 3 months correlation between Capital and International is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Capital World Bond and International Government Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Government and Capital World 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 Capital World Bond are associated (or correlated) with International Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Government has no effect on the direction of Capital World i.e., Capital World and International Government go up and down completely randomly.

Pair Corralation between Capital World and International Government

Assuming the 90 days horizon Capital World Bond is expected to under-perform the International Government. In addition to that, Capital World is 1.05 times more volatile than International Government Bond. It trades about -0.18 of its total potential returns per unit of risk. International Government Bond is currently generating about -0.13 per unit of volatility. If you would invest  1,041  in International Government Bond on September 13, 2024 and sell it today you would lose (26.00) from holding International Government Bond or give up 2.5% of portfolio value over 90 days.

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

Capital World Bond  vs.  International Government Bond

Capital World Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

International Government

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Capital World and International Government

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

The idea behind Capital World Bond and International Government Bond 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.