Correlation Between Short Term and Equity Income
Can any of the company-specific risk be diversified away by investing in both Short Term 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 Short Term and Equity 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 Equity Income Fund, you can compare the effects of market volatilities on Short Term 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 Short Term with a short position of Equity Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Term and Equity Income.
Diversification Opportunities for Short Term and Equity Income
-0.42 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Short and Equity is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government 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 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 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 Short Term i.e., Short Term and Equity Income go up and down completely randomly.
Pair Corralation between Short Term and Equity Income
Assuming the 90 days horizon Short Term is expected to generate 1.14 times less return on investment than Equity Income. But when comparing it to its historical volatility, Short Term Government Fund is 3.62 times less risky than Equity Income. It trades about 0.08 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 904.00 in Equity Income Fund on September 1, 2024 and sell it today you would earn a total of 67.00 from holding Equity Income Fund or generate 7.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Short Term Government Fund vs. Equity Income Fund
Performance |
| Timeline |
| Short Term Government |
| Equity Income |
Short Term and Equity Income Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Short Term and Equity Income
The main advantage of trading using opposite Short Term and Equity Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short Term 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.| Short Term vs. Government Bond Fund | Short Term vs. Ginnie Mae Fund | Short Term vs. Inflation Adjusted Bond Fund | Short Term vs. Balanced Fund Investor |
| Equity Income vs. Mid Cap Value | Equity Income vs. American Balanced Fund | Equity Income vs. Small Cap Value | Equity Income vs. American Funds 2020 |
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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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