Correlation Between Inflation Protection and Equity Income
Can any of the company-specific risk be diversified away by investing in both Inflation Protection and Equity Income 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 Inflation Protection and Equity Income into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Inflation Protection Fund and Equity Income Fund, you can compare the effects of market volatilities on Inflation Protection and Equity Income 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 Inflation Protection with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Inflation Protection and Equity Income.
Diversification Opportunities for Inflation Protection and Equity Income
-0.55 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Inflation and Equity is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Inflation Protection Fund and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Inflation Protection 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 Inflation Protection Fund are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Inflation Protection i.e., Inflation Protection and Equity Income go up and down completely randomly.
Pair Corralation between Inflation Protection and Equity Income
Assuming the 90 days horizon Inflation Protection is expected to generate 6.57 times less return on investment than Equity Income. But when comparing it to its historical volatility, Inflation Protection Fund is 2.25 times less risky than Equity Income. It trades about 0.05 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 3,522 in Equity Income Fund on August 26, 2024 and sell it today you would earn a total of 1,012 from holding Equity Income Fund or generate 28.73% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Inflation Protection Fund vs. Equity Income Fund
Performance |
| Timeline |
| Inflation Protection |
| Equity Income |
Inflation Protection and Equity Income Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Inflation Protection and Equity Income
The main advantage of trading using opposite Inflation Protection and Equity Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inflation Protection position performs unexpectedly, Equity Income 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 Equity Income will offset losses from the drop in Equity Income's long position.The idea behind Inflation Protection Fund and Equity Income 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.
| Equity Income vs. Strategic Asset Management | Equity Income vs. Strategic Asset Management | Equity Income vs. Strategic Asset Management | Equity Income vs. Strategic Asset Management |
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 Stocks Directory module to find actively traded stocks across global markets.
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