Correlation Between Smead Value and Inverse Government

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

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

Diversification Opportunities for Smead Value and Inverse Government

0.25

Correlation Coefficient

Smead Value  Inverse Government

Modest diversification

The 3 months correlation between Smead and Inverse is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Smead Value Fund and Inverse Government Long in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Government Long and Smead Value 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 Smead Value Fund are associated (or correlated) with Inverse Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Government Long has no effect on the direction of Smead Value i.e., Smead Value and Inverse Government go up and down completely randomly.

Pair Corralation between Smead Value and Inverse Government

Assuming the 90 days horizon Smead Value Fund is expected to under-perform the Inverse Government. But the mutual fund apears to be less risky and, when comparing its historical volatility, Smead Value Fund is 1.46 times less risky than Inverse Government. The mutual fund trades about -0.13 of its potential returns per unit of risk. The Inverse Government Long is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  17,964  in Inverse Government Long on September 29, 2024 and sell it today you would earn a total of  532.00  from holding Inverse Government Long or generate 2.96% return on investment over 90 days.

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

Smead Value Fund  vs.  Inverse Government Long

Smead Value Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smead Value Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Inverse Government Long

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Government Long are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Inverse 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 Smead Value and Inverse Government

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

The idea behind Smead Value Fund and Inverse Government Long 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.