Correlation Between Value Equity and Defensive Market

Can any of the company-specific risk be diversified away by investing in both Value Equity and Defensive 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 Value Equity and Defensive Market into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Value Equity Institutional and Defensive Market Strategies, you can compare the effects of market volatilities on Value Equity and Defensive 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 Value Equity with a short position of Defensive Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Value Equity and Defensive Market.

Diversification Opportunities for Value Equity and Defensive Market

0.9

Correlation Coefficient

Value Equity  Defensive Market

Almost no diversification

The 3 months correlation between Value and Defensive is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Value Equity Institutional and Defensive Market Strategies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Defensive Market Str and Value Equity 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 Value Equity Institutional are associated (or correlated) with Defensive Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Defensive Market Str has no effect on the direction of Value Equity i.e., Value Equity and Defensive Market go up and down completely randomly.

Pair Corralation between Value Equity and Defensive Market

Assuming the 90 days horizon Value Equity Institutional is expected to generate 0.73 times more return on investment than Defensive Market. However, Value Equity Institutional is 1.38 times less risky than Defensive Market. It trades about 0.04 of its potential returns per unit of risk. Defensive Market Strategies is currently generating about 0.03 per unit of risk. If you would invest  1,652  in Value Equity Institutional on February 20, 2024 and sell it today you would earn a total of  311.00  from holding Value Equity Institutional or generate 18.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Value Equity Institutional  vs.  Defensive Market Strategies

Value Equity Institu

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Value Equity Institutional are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Value Equity may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Defensive Market Str

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Defensive Market Strategies are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Defensive Market is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Value Equity and Defensive Market

The main advantage of trading using opposite Value Equity and Defensive Market positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Equity position performs unexpectedly, Defensive 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 Defensive Market will offset losses from the drop in Defensive Market's long position.

The idea behind Value Equity Institutional and Defensive Market Strategies 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.