Correlation Between Five Year and US Dollar

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

By analyzing existing cross correlation between Five Year Treasury Note and US Dollar, you can compare the effects of market volatilities on Five Year and US Dollar 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 Five Year with a short position of US Dollar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Five Year and US Dollar.

Diversification Opportunities for Five Year and US Dollar

-0.94

Correlation Coefficient

Five Year  US Dollar

Pay attention - limited upside

The 3 months correlation between Five and DXUSD is -0.94. Overlapping area represents the amount of risk that can be diversified away by holding Five Year Treasury Note and US Dollar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Dollar and Five Year 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 Five Year Treasury Note are associated (or correlated) with US Dollar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Dollar has no effect on the direction of Five Year i.e., Five Year and US Dollar go up and down completely randomly.

Pair Corralation between Five Year and US Dollar

Assuming the 90 days horizon Five Year is expected to generate 4.42 times less return on investment than US Dollar. But when comparing it to its historical volatility, Five Year Treasury Note is 2.92 times less risky than US Dollar. It trades about 0.09 of its potential returns per unit of risk. US Dollar is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  10,420  in US Dollar on September 2, 2024 and sell it today you would earn a total of  163.00  from holding US Dollar or generate 1.56% return on investment over 90 days.

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

Five Year Treasury Note  vs.  US Dollar

Five Year Treasury

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Five Year Treasury Note has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Five Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

US Dollar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in US Dollar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, US Dollar is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Five Year and US Dollar

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

The idea behind Five Year Treasury Note and US Dollar 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.