Correlation Between Low Duration and Investment Grade
Can any of the company-specific risk be diversified away by investing in both Low Duration and Investment Grade 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 Low Duration and Investment Grade into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Low Duration Fund and Investment Grade Porate, you can compare the effects of market volatilities on Low Duration and Investment Grade 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 Low Duration with a short position of Investment Grade. Check out your portfolio center. Please also check ongoing floating volatility patterns of Low Duration and Investment Grade.
Diversification Opportunities for Low Duration and Investment Grade
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Low and Investment is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Low Duration Fund and Investment Grade Porate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Grade Porate and Low Duration 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 Low Duration Fund are associated (or correlated) with Investment Grade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Grade Porate has no effect on the direction of Low Duration i.e., Low Duration and Investment Grade go up and down completely randomly.
Pair Corralation between Low Duration and Investment Grade
Assuming the 90 days horizon Low Duration is expected to generate 3.65 times less return on investment than Investment Grade. But when comparing it to its historical volatility, Low Duration Fund is 4.53 times less risky than Investment Grade. It trades about 0.11 of its potential returns per unit of risk. Investment Grade Porate is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest 898.00 in Investment Grade Porate on August 31, 2024 and sell it today you would earn a total of 7.00 from holding Investment Grade Porate or generate 0.78% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Low Duration Fund vs. Investment Grade Porate
Performance |
| Timeline |
| Low Duration |
| Investment Grade Porate |
Low Duration and Investment Grade Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Low Duration and Investment Grade
The main advantage of trading using opposite Low Duration and Investment Grade positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Low Duration position performs unexpectedly, Investment Grade 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 Investment Grade will offset losses from the drop in Investment Grade's long position.| Low Duration vs. Vanguard Short Term Bond | Low Duration vs. Vanguard Short Term Investment Grade | Low Duration vs. Vanguard Short Term Investment Grade | Low Duration vs. Vanguard Short Term Bond |
| Investment Grade vs. Investment Of America | Investment Grade vs. Investment Grade Bond | Investment Grade vs. Investment Grade Bond | Investment Grade vs. Investment Grade Bond |
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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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