Correlation Between Short Duration and Select Equity

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

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

Diversification Opportunities for Short Duration and Select Equity

-0.39

Correlation Coefficient

Short Duration  Select Equity

Very good diversification

The 3 months correlation between Short and Select is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Short Duration Bond and Select Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Equity and Short 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 Short Duration Bond are associated (or correlated) with Select Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Equity has no effect on the direction of Short Duration i.e., Short Duration and Select Equity go up and down completely randomly.

Pair Corralation between Short Duration and Select Equity

Assuming the 90 days horizon Short Duration Bond is expected to under-perform the Select Equity. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Duration Bond is 6.13 times less risky than Select Equity. The mutual fund trades about -0.15 of its potential returns per unit of risk. The Select Equity Fund is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,935  in Select Equity Fund on September 20, 2024 and sell it today you would earn a total of  133.00  from holding Select Equity Fund or generate 6.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Short Duration Bond  vs.  Select Equity Fund

Short Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Select Equity

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Select Equity Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Select Equity may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Short Duration and Select Equity

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

The idea behind Short Duration Bond and Select 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.