Correlation Between Income Stock and Government Securities

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

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

Diversification Opportunities for Income Stock and Government Securities

0.34

Correlation Coefficient

Income Stock  Government Securities

Weak diversification

The 3 months correlation between Income and Government is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Income Stock Fund and Government Securities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Securities and Income Stock 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 Income Stock Fund are associated (or correlated) with Government Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Securities has no effect on the direction of Income Stock i.e., Income Stock and Government Securities go up and down completely randomly.

Pair Corralation between Income Stock and Government Securities

Assuming the 90 days horizon Income Stock Fund is expected to under-perform the Government Securities. In addition to that, Income Stock is 7.46 times more volatile than Government Securities Fund. It trades about -0.12 of its total potential returns per unit of risk. Government Securities Fund is currently generating about -0.18 per unit of volatility. If you would invest  897.00  in Government Securities Fund on September 26, 2024 and sell it today you would lose (26.00) from holding Government Securities Fund or give up 2.9% of portfolio value over 90 days.

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

Income Stock Fund  vs.  Government Securities Fund

Income Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Income Stock 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 basic 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.

Government Securities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Income Stock and Government Securities

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

The idea behind Income Stock Fund and Government Securities 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.

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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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.