Correlation Between Energy Fund and Government Long

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

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

Diversification Opportunities for Energy Fund and Government Long

-0.6

Correlation Coefficient

Energy Fund  Government Long

Excellent diversification

The 3 months correlation between Energy and Government is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Energy Fund Class and Government Long Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Long Bond and Energy Fund 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 Energy Fund Class are associated (or correlated) with Government Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Long Bond has no effect on the direction of Energy Fund i.e., Energy Fund and Government Long go up and down completely randomly.

Pair Corralation between Energy Fund and Government Long

Assuming the 90 days horizon Energy Fund Class is expected to generate 1.11 times more return on investment than Government Long. However, Energy Fund is 1.11 times more volatile than Government Long Bond. It trades about 0.09 of its potential returns per unit of risk. Government Long Bond is currently generating about -0.09 per unit of risk. If you would invest  19,945  in Energy Fund Class on September 2, 2024 and sell it today you would earn a total of  1,273  from holding Energy Fund Class or generate 6.38% return on investment over 90 days.

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

Energy Fund Class  vs.  Government Long Bond

Energy Fund Class

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Fund Class are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Energy Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Government Long Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Energy Fund and Government Long

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

The idea behind Energy Fund Class and Government Long 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.