Correlation Between Short Term and Strategic Income

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

Diversification Opportunities for Short Term and Strategic Income

0.92
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Short and Strategic is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Strategic Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Income and Short 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 Short Term Government Fund are associated (or correlated) with Strategic Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Income has no effect on the direction of Short Term i.e., Short Term and Strategic Income go up and down completely randomly.

Pair Corralation between Short Term and Strategic Income

Assuming the 90 days horizon Short Term is expected to generate 3.39 times less return on investment than Strategic Income. But when comparing it to its historical volatility, Short Term Government Fund is 1.81 times less risky than Strategic Income. It trades about 0.11 of its potential returns per unit of risk. Strategic Income Fund is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  894.00  in Strategic Income Fund on September 12, 2024 and sell it today you would earn a total of  7.00  from holding Strategic Income Fund or generate 0.78% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy95.45%
ValuesDaily Returns

Short Term Government Fund  vs.  Strategic Income Fund

 Performance 
       Timeline  
Short Term Government 

Risk-Adjusted Performance

0 of 100

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

Risk-Adjusted Performance

0 of 100

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

Short Term and Strategic Income Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Short Term and Strategic Income

The main advantage of trading using opposite Short Term and Strategic Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short Term position performs unexpectedly, Strategic 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 Strategic Income will offset losses from the drop in Strategic Income's long position.
The idea behind Short Term Government Fund and Strategic 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.
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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.

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