Correlation Between Government Securities and International Equities

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

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

Diversification Opportunities for Government Securities and International Equities

0.73

Correlation Coefficient

Government Securities  International Equities

Poor diversification

The 3 months correlation between Government and International is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Government Securities Fund and International Equities Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equities and Government Securities 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 Government Securities Fund are associated (or correlated) with International Equities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equities has no effect on the direction of Government Securities i.e., Government Securities and International Equities go up and down completely randomly.

Pair Corralation between Government Securities and International Equities

Assuming the 90 days horizon Government Securities Fund is expected to generate 0.34 times more return on investment than International Equities. However, Government Securities Fund is 2.98 times less risky than International Equities. It trades about -0.06 of its potential returns per unit of risk. International Equities Index is currently generating about -0.05 per unit of risk. If you would invest  956.00  in Government Securities Fund on September 4, 2024 and sell it today you would lose (11.00) from holding Government Securities Fund or give up 1.15% of portfolio value over 90 days.

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

Government Securities Fund  vs.  International Equities Index

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.

International Equities

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Government Securities and International Equities

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

The idea behind Government Securities Fund and International Equities Index 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.