Correlation Between Equity Index and Low-duration Bond
Can any of the company-specific risk be diversified away by investing in both Equity Index and Low-duration Bond 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 Index and Low-duration Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equity Index Investor and Low Duration Bond Investor, you can compare the effects of market volatilities on Equity Index and Low-duration Bond 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 Index with a short position of Low-duration Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Index and Low-duration Bond.
Diversification Opportunities for Equity Index and Low-duration Bond
-0.47 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Equity and Low-duration is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding Equity Index Investor and Low Duration Bond Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Low Duration Bond and Equity Index 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 Index Investor are associated (or correlated) with Low-duration Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Low Duration Bond has no effect on the direction of Equity Index i.e., Equity Index and Low-duration Bond go up and down completely randomly.
Pair Corralation between Equity Index and Low-duration Bond
Assuming the 90 days horizon Equity Index Investor is expected to generate 8.33 times more return on investment than Low-duration Bond. However, Equity Index is 8.33 times more volatile than Low Duration Bond Investor. It trades about 0.13 of its potential returns per unit of risk. Low Duration Bond Investor is currently generating about 0.2 per unit of risk. If you would invest 5,271 in Equity Index Investor on September 3, 2024 and sell it today you would earn a total of 860.00 from holding Equity Index Investor or generate 16.32% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Equity Index Investor vs. Low Duration Bond Investor
Performance |
| Timeline |
| Equity Index Investor |
| Low Duration Bond |
Equity Index and Low-duration Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Equity Index and Low-duration Bond
The main advantage of trading using opposite Equity Index and Low-duration Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Index position performs unexpectedly, Low-duration Bond 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 Low-duration Bond will offset losses from the drop in Low-duration Bond's long position.| Equity Index vs. Growth Equity Investor | Equity Index vs. Value Equity Investor | Equity Index vs. Small Cap Equity | Equity Index vs. International Equity Investor |
| Low-duration Bond vs. Smallcap Growth Fund | Low-duration Bond vs. Pace Smallmedium Growth | Low-duration Bond vs. Pace Large Growth | Low-duration Bond vs. Franklin Growth Opportunities |
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 Money Managers module to screen money managers from public funds and ETFs managed around the world.
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