Correlation Between Long-term and Foreign Bond

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Can any of the company-specific risk be diversified away by investing in both Long-term and Foreign 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 Long-term and Foreign Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Long Term Government Fund and Foreign Bond Fund, you can compare the effects of market volatilities on Long-term and Foreign 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 Long-term with a short position of Foreign Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Long-term and Foreign Bond.

Diversification Opportunities for Long-term and Foreign Bond

0.9
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Long-term and Foreign is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Long Term Government Fund and Foreign Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Foreign Bond and Long-term 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 Long Term Government Fund are associated (or correlated) with Foreign Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Foreign Bond has no effect on the direction of Long-term i.e., Long-term and Foreign Bond go up and down completely randomly.

Pair Corralation between Long-term and Foreign Bond

Assuming the 90 days horizon Long Term Government Fund is expected to generate 1.93 times more return on investment than Foreign Bond. However, Long-term is 1.93 times more volatile than Foreign Bond Fund. It trades about -0.05 of its potential returns per unit of risk. Foreign Bond Fund is currently generating about -0.15 per unit of risk. If you would invest  1,416  in Long Term Government Fund on August 28, 2024 and sell it today you would lose (14.00) from holding Long Term Government Fund or give up 0.99% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Long Term Government Fund  vs.  Foreign Bond Fund

 Performance 
       Timeline  
Long Term Government 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Long Term Government Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Long-term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Foreign Bond 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Foreign Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Foreign Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Long-term and Foreign Bond Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Long-term and Foreign Bond

The main advantage of trading using opposite Long-term and Foreign Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Long-term position performs unexpectedly, Foreign 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 Foreign Bond will offset losses from the drop in Foreign Bond's long position.
The idea behind Long Term Government Fund and Foreign Bond 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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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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.

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