Correlation Between Equity Growth and Equity Income
Can any of the company-specific risk be diversified away by investing in both Equity Growth and Equity 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 Equity Growth and Equity Income into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equity Growth Fund and Equity Income Fund, you can compare the effects of market volatilities on Equity Growth and Equity 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 Equity Growth with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Growth and Equity Income.
Diversification Opportunities for Equity Growth and Equity Income
0.66 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Equity and Equity is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Fund and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Equity Growth 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 Equity Growth Fund are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Equity Growth i.e., Equity Growth and Equity Income go up and down completely randomly.
Pair Corralation between Equity Growth and Equity Income
Assuming the 90 days horizon Equity Growth Fund is expected to generate 1.59 times more return on investment than Equity Income. However, Equity Growth is 1.59 times more volatile than Equity Income Fund. It trades about 0.21 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.16 per unit of risk. If you would invest 3,316 in Equity Growth Fund on August 29, 2024 and sell it today you would earn a total of 133.00 from holding Equity Growth Fund or generate 4.01% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Equity Growth Fund vs. Equity Income Fund
Performance |
| Timeline |
| Equity Growth |
| Equity Income |
Equity Growth and Equity Income Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Equity Growth and Equity Income
The main advantage of trading using opposite Equity Growth and Equity Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Growth position performs unexpectedly, Equity 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 Equity Income will offset losses from the drop in Equity Income's long position.| Equity Growth vs. Vanguard Total Stock | Equity Growth vs. Vanguard 500 Index | Equity Growth vs. Vanguard Total Stock | Equity Growth vs. Vanguard Total Stock |
| Equity Income vs. Strategic Allocation Aggressive | Equity Income vs. Fundamental Large Cap | Equity Income vs. T Rowe Price | Equity Income vs. Goldman Sachs Large |
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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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