Correlation Between High Yield and Low Duration
Can any of the company-specific risk be diversified away by investing in both High Yield and Low Duration 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 High Yield and Low Duration into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between High Yield Fund and Low Duration Fund, you can compare the effects of market volatilities on High Yield and Low Duration 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 High Yield with a short position of Low Duration. Check out your portfolio center. Please also check ongoing floating volatility patterns of High Yield and Low Duration.
Diversification Opportunities for High Yield and Low Duration
0.63 | Correlation Coefficient |
Poor diversification
The 3 months correlation between High and Low is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding High Yield Fund and Low Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Low Duration and High Yield 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 High Yield Fund are associated (or correlated) with Low Duration. 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 has no effect on the direction of High Yield i.e., High Yield and Low Duration go up and down completely randomly.
Pair Corralation between High Yield and Low Duration
Assuming the 90 days horizon High Yield Fund is expected to generate 1.83 times more return on investment than Low Duration. However, High Yield is 1.83 times more volatile than Low Duration Fund. It trades about 0.2 of its potential returns per unit of risk. Low Duration Fund is currently generating about 0.05 per unit of risk. If you would invest 802.00 in High Yield Fund on August 30, 2024 and sell it today you would earn a total of 6.00 from holding High Yield Fund or generate 0.75% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
High Yield Fund vs. Low Duration Fund
Performance |
| Timeline |
| High Yield Fund |
| Low Duration |
High Yield and Low Duration Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with High Yield and Low Duration
The main advantage of trading using opposite High Yield and Low Duration positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if High Yield position performs unexpectedly, Low Duration 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 will offset losses from the drop in Low Duration's long position.| High Yield vs. Emerging Markets Bond | High Yield vs. Pimco Foreign Bond | High Yield vs. Real Return Fund | High Yield vs. Low Duration Fund |
| Low Duration vs. Real Return Fund | Low Duration vs. Pimco Foreign Bond | Low Duration vs. Commodityrealreturn Strategy Fund | Low Duration vs. High Yield 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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