Correlation Between International Equity and Short-term Government
Can any of the company-specific risk be diversified away by investing in both International Equity and Short-term Government 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 International Equity and Short-term Government into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between International Equity Fund and Short Term Government Securities, you can compare the effects of market volatilities on International Equity and Short-term Government 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 International Equity with a short position of Short-term Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Short-term Government.
Diversification Opportunities for International Equity and Short-term Government
0.67 | Correlation Coefficient |
Poor diversification
The 3 months correlation between International and Short-term is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Fund and Short Term Government Securiti in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Term Government and International Equity 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 International Equity Fund are associated (or correlated) with Short-term Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Term Government has no effect on the direction of International Equity i.e., International Equity and Short-term Government go up and down completely randomly.
Pair Corralation between International Equity and Short-term Government
Assuming the 90 days horizon International Equity Fund is expected to generate 4.51 times more return on investment than Short-term Government. However, International Equity is 4.51 times more volatile than Short Term Government Securities. It trades about 0.04 of its potential returns per unit of risk. Short Term Government Securities is currently generating about 0.13 per unit of risk. If you would invest 942.00 in International Equity Fund on August 28, 2024 and sell it today you would earn a total of 40.00 from holding International Equity Fund or generate 4.25% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
International Equity Fund vs. Short Term Government Securiti
Performance |
| Timeline |
| International Equity |
| Short Term Government |
International Equity and Short-term Government Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with International Equity and Short-term Government
The main advantage of trading using opposite International Equity and Short-term Government positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if International Equity position performs unexpectedly, Short-term Government 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 Short-term Government will offset losses from the drop in Short-term Government's long position.| International Equity vs. James Balanced Golden | International Equity vs. Fidelity Advisor Gold | International Equity vs. Franklin Gold Precious | International Equity vs. Europac Gold Fund |
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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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