Correlation Between Short-term Government and Stock Index
Can any of the company-specific risk be diversified away by investing in both Short-term Government and Stock Index 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 Short-term Government and Stock Index into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Short Term Government Securities and Stock Index Fund, you can compare the effects of market volatilities on Short-term Government and Stock Index 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 Short-term Government with a short position of Stock Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Stock Index.
Diversification Opportunities for Short-term Government and Stock Index
-0.6 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Short-term and Stock is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Securiti and Stock Index Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Stock Index Fund and Short-term Government 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 Short Term Government Securities are associated (or correlated) with Stock Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Stock Index Fund has no effect on the direction of Short-term Government i.e., Short-term Government and Stock Index go up and down completely randomly.
Pair Corralation between Short-term Government and Stock Index
Assuming the 90 days horizon Short-term Government is expected to generate 17.04 times less return on investment than Stock Index. But when comparing it to its historical volatility, Short Term Government Securities is 5.01 times less risky than Stock Index. It trades about 0.05 of its potential returns per unit of risk. Stock Index Fund is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest 4,239 in Stock Index Fund on August 28, 2024 and sell it today you would earn a total of 147.00 from holding Stock Index Fund or generate 3.47% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Short Term Government Securiti vs. Stock Index Fund
Performance |
| Timeline |
| Short Term Government |
| Stock Index Fund |
Short-term Government and Stock Index Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Short-term Government and Stock Index
The main advantage of trading using opposite Short-term Government and Stock Index positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Government position performs unexpectedly, Stock Index 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 Stock Index will offset losses from the drop in Stock Index's long position.The idea behind Short Term Government Securities and Stock Index Fund 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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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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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