Correlation Between Multifactor Equity and Equity Growth

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

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

Diversification Opportunities for Multifactor Equity and Equity Growth

0.77

Correlation Coefficient

Multifactor Equity  Equity Growth

Poor diversification

The 3 months correlation between Multifactor and Equity is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Multifactor Equity Fund and Equity Growth Strategy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Growth Strategy and Multifactor Equity 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 Multifactor Equity Fund are associated (or correlated) with Equity Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Growth Strategy has no effect on the direction of Multifactor Equity i.e., Multifactor Equity and Equity Growth go up and down completely randomly.

Pair Corralation between Multifactor Equity and Equity Growth

Assuming the 90 days horizon Multifactor Equity Fund is expected to generate 1.26 times more return on investment than Equity Growth. However, Multifactor Equity is 1.26 times more volatile than Equity Growth Strategy. It trades about 0.19 of its potential returns per unit of risk. Equity Growth Strategy is currently generating about 0.11 per unit of risk. If you would invest  1,893  in Multifactor Equity Fund on September 16, 2024 and sell it today you would earn a total of  161.00  from holding Multifactor Equity Fund or generate 8.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.92%
Values	Daily Returns

Multifactor Equity Fund  vs.  Equity Growth Strategy

Multifactor Equity

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 14 (%) 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.

Equity Growth Strategy

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Growth Strategy are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Equity Growth is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Multifactor Equity and Equity Growth

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

The idea behind Multifactor Equity Fund and Equity Growth Strategy 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.