Correlation Between High Income and Growth Income

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

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

Diversification Opportunities for High Income and Growth Income

0.26

Correlation Coefficient

High Income  Growth Income

Modest diversification

The 3 months correlation between High and Growth is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding High Income Fund and Growth Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Growth Income and High Income 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 High Income Fund are associated (or correlated) with Growth Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Growth Income has no effect on the direction of High Income i.e., High Income and Growth Income go up and down completely randomly.

Pair Corralation between High Income and Growth Income

Assuming the 90 days horizon High Income Fund is expected to generate 0.09 times more return on investment than Growth Income. However, High Income Fund is 11.67 times less risky than Growth Income. It trades about -0.04 of its potential returns per unit of risk. Growth Income Fund is currently generating about -0.1 per unit of risk. If you would invest  686.00  in High Income Fund on September 25, 2024 and sell it today you would lose (3.00) from holding High Income Fund or give up 0.44% of portfolio value over 90 days.

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

High Income Fund  vs.  Growth Income Fund

High Income Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Growth Income

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Growth Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with High Income and Growth Income

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

The idea behind High Income Fund and Growth Income 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.