Correlation Between Investment Grade and Investment Quality

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

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

Diversification Opportunities for Investment Grade and Investment Quality

0.99

Correlation Coefficient

Investment Grade  Investment Quality

No risk reduction

The 3 months correlation between Investment and Investment is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Investment Grade Bond and Investment Quality Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Quality Bond and Investment Grade 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 Investment Grade Bond are associated (or correlated) with Investment Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Quality Bond has no effect on the direction of Investment Grade i.e., Investment Grade and Investment Quality go up and down completely randomly.

Pair Corralation between Investment Grade and Investment Quality

Assuming the 90 days horizon Investment Grade Bond is expected to under-perform the Investment Quality. In addition to that, Investment Grade is 1.17 times more volatile than Investment Quality Bond. It trades about -0.06 of its total potential returns per unit of risk. Investment Quality Bond is currently generating about -0.07 per unit of volatility. If you would invest  948.00  in Investment Quality Bond on September 4, 2024 and sell it today you would lose (11.00) from holding Investment Quality Bond or give up 1.16% of portfolio value over 90 days.

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

Investment Grade Bond  vs.  Investment Quality Bond

Investment Grade Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Investment Quality Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Investment Grade and Investment Quality

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

The idea behind Investment Grade Bond and Investment Quality 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .