Correlation Between Equity Income and Strategic Allocation

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

By analyzing existing cross correlation between Equity Income Fund and Strategic Allocation Aggressive, you can compare the effects of market volatilities on Equity Income and Strategic Allocation 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 Equity Income with a short position of Strategic Allocation. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Income and Strategic Allocation.

Diversification Opportunities for Equity Income and Strategic Allocation

0.86

Correlation Coefficient

Equity Income  Strategic Allocation

Very poor diversification

The 3 months correlation between Equity and Strategic is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Fund and Strategic Allocation Aggressiv in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Allocation and Equity Income 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 Equity Income Fund are associated (or correlated) with Strategic Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Allocation has no effect on the direction of Equity Income i.e., Equity Income and Strategic Allocation go up and down completely randomly.

Pair Corralation between Equity Income and Strategic Allocation

Assuming the 90 days horizon Equity Income Fund is expected to under-perform the Strategic Allocation. In addition to that, Equity Income is 1.21 times more volatile than Strategic Allocation Aggressive. It trades about -0.02 of its total potential returns per unit of risk. Strategic Allocation Aggressive is currently generating about 0.04 per unit of volatility. If you would invest  786.00  in Strategic Allocation Aggressive on March 10, 2024 and sell it today you would earn a total of  3.00  from holding Strategic Allocation Aggressive or generate 0.38% return on investment over 90 days.

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

Equity Income Fund  vs.  Strategic Allocation Aggressiv

Equity Income

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Equity Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Strategic Allocation

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Strategic Allocation Aggressive are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Strategic Allocation is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Income and Strategic Allocation

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

The idea behind Equity Income Fund and Strategic Allocation Aggressive 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.

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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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.