Correlation Between Inverse Government and Extended Market
Can any of the company-specific risk be diversified away by investing in both Inverse Government and Extended Market 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 Inverse Government and Extended Market into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Inverse Government Long and Extended Market Index, you can compare the effects of market volatilities on Inverse Government and Extended Market 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 Inverse Government with a short position of Extended Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Inverse Government and Extended Market.
Diversification Opportunities for Inverse Government and Extended Market
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Inverse and Extended is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Inverse Government Long and Extended Market Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extended Market Index and Inverse 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 Inverse Government Long are associated (or correlated) with Extended Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extended Market Index has no effect on the direction of Inverse Government i.e., Inverse Government and Extended Market go up and down completely randomly.
Pair Corralation between Inverse Government and Extended Market
Assuming the 90 days horizon Inverse Government is expected to generate 1.06 times less return on investment than Extended Market. But when comparing it to its historical volatility, Inverse Government Long is 1.35 times less risky than Extended Market. It trades about 0.25 of its potential returns per unit of risk. Extended Market Index is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest 2,307 in Extended Market Index on August 28, 2024 and sell it today you would earn a total of 221.00 from holding Extended Market Index or generate 9.58% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Inverse Government Long vs. Extended Market Index
Performance |
| Timeline |
| Inverse Government Long |
| Extended Market Index |
Inverse Government and Extended Market Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Inverse Government and Extended Market
The main advantage of trading using opposite Inverse Government and Extended Market positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inverse Government position performs unexpectedly, Extended Market 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 Extended Market will offset losses from the drop in Extended Market's long position.The idea behind Inverse Government Long and Extended Market Index 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.
| Extended Market vs. Income Fund Income | Extended Market vs. Usaa Nasdaq 100 | Extended Market vs. Victory Diversified Stock | Extended Market vs. Intermediate Term Bond 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
Other Complementary Tools
| Options Analysis Analyze and evaluate options and option chains as a potential hedge for your portfolios | |
| Portfolio Holdings Check your current holdings and cash postion to detemine if your portfolio needs rebalancing | |
| Portfolio Volatility Check portfolio volatility and analyze historical return density to properly model market risk | |
| Alpha Finder Use alpha and beta coefficients to find investment opportunities after accounting for the risk | |
| Portfolio Center All portfolio management and optimization tools to improve performance of your portfolios |