Correlation Between Short Term and Absolute Capital

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

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

Diversification Opportunities for Short Term and Absolute Capital

-0.69

Correlation Coefficient

Short Term  Absolute Capital

Excellent diversification

The 3 months correlation between Short and Absolute is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Absolute Capital Asset in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Absolute Capital Asset and Short Term 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 Term Government Fund are associated (or correlated) with Absolute Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Absolute Capital Asset has no effect on the direction of Short Term i.e., Short Term and Absolute Capital go up and down completely randomly.

Pair Corralation between Short Term and Absolute Capital

Assuming the 90 days horizon Short Term Government Fund is expected to under-perform the Absolute Capital. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Term Government Fund is 5.51 times less risky than Absolute Capital. The mutual fund trades about -0.14 of its potential returns per unit of risk. The Absolute Capital Asset is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1,150  in Absolute Capital Asset on September 17, 2024 and sell it today you would earn a total of  66.00  from holding Absolute Capital Asset or generate 5.74% return on investment over 90 days.

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

Short Term Government Fund  vs.  Absolute Capital Asset

Short Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

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

Absolute Capital Asset

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Absolute Capital Asset are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Absolute Capital is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short Term and Absolute Capital

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

The idea behind Short Term Government Fund and Absolute Capital Asset 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.