Correlation Between Diamond Hill and Prudential Government

Can any of the company-specific risk be diversified away by investing in both Diamond Hill and Prudential Government 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 Diamond Hill and Prudential Government into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Diamond Hill Small and Prudential Government Income, you can compare the effects of market volatilities on Diamond Hill and Prudential Government 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 Diamond Hill with a short position of Prudential Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diamond Hill and Prudential Government.

Diversification Opportunities for Diamond Hill and Prudential Government

-0.66

Correlation Coefficient

Diamond Hill  Prudential Government

Excellent diversification

The 3 months correlation between Diamond and Prudential is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Diamond Hill Small and Prudential Government Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Government and Diamond Hill 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 Diamond Hill Small are associated (or correlated) with Prudential Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Government has no effect on the direction of Diamond Hill i.e., Diamond Hill and Prudential Government go up and down completely randomly.

Pair Corralation between Diamond Hill and Prudential Government

Assuming the 90 days horizon Diamond Hill Small is expected to under-perform the Prudential Government. In addition to that, Diamond Hill is 3.4 times more volatile than Prudential Government Income. It trades about -0.09 of its total potential returns per unit of risk. Prudential Government Income is currently generating about 0.18 per unit of volatility. If you would invest  785.00  in Prudential Government Income on September 11, 2024 and sell it today you would earn a total of  8.00  from holding Prudential Government Income or generate 1.02% return on investment over 90 days.

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

Diamond Hill Small  vs.  Prudential Government Income

Diamond Hill Small

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Diamond Hill Small are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Diamond Hill showed solid returns over the last few months and may actually be approaching a breakup point.

Prudential Government

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Diamond Hill and Prudential Government

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

The idea behind Diamond Hill Small and Prudential Government Income 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.