Correlation Between California Bond and High Yield

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

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

Diversification Opportunities for California Bond and High Yield

0.72

Correlation Coefficient

California Bond  High Yield

Poor diversification

The 3 months correlation between California and High is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and High Yield Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on High Yield Fund and California Bond 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 California Bond Fund are associated (or correlated) with High Yield. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of High Yield Fund has no effect on the direction of California Bond i.e., California Bond and High Yield go up and down completely randomly.

Pair Corralation between California Bond and High Yield

Assuming the 90 days horizon California Bond Fund is expected to under-perform the High Yield. In addition to that, California Bond is 1.83 times more volatile than High Yield Fund. It trades about -0.08 of its total potential returns per unit of risk. High Yield Fund is currently generating about -0.04 per unit of volatility. If you would invest  750.00  in High Yield Fund on September 26, 2024 and sell it today you would lose (3.00) from holding High Yield Fund or give up 0.4% of portfolio value over 90 days.

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

California Bond Fund  vs.  High Yield Fund

California Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

High Yield Fund

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with California Bond and High Yield

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

The idea behind California Bond Fund and High Yield 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.