Correlation Between Investment Quality and Moderate Balanced

Can any of the company-specific risk be diversified away by investing in both Investment Quality and Moderate Balanced 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 Investment Quality and Moderate Balanced into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Investment Quality Bond and Moderate Balanced Allocation, you can compare the effects of market volatilities on Investment Quality and Moderate Balanced 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 Investment Quality with a short position of Moderate Balanced. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment Quality and Moderate Balanced.

Diversification Opportunities for Investment Quality and Moderate Balanced

-0.7

Correlation Coefficient

Investment Quality  Moderate Balanced

Excellent diversification

The 3 months correlation between Investment and Moderate is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Investment Quality Bond and Moderate Balanced Allocation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Balanced and Investment Quality 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 Investment Quality Bond are associated (or correlated) with Moderate Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Balanced has no effect on the direction of Investment Quality i.e., Investment Quality and Moderate Balanced go up and down completely randomly.

Pair Corralation between Investment Quality and Moderate Balanced

Assuming the 90 days horizon Investment Quality is expected to generate 5.85 times less return on investment than Moderate Balanced. But when comparing it to its historical volatility, Investment Quality Bond is 1.94 times less risky than Moderate Balanced. It trades about 0.04 of its potential returns per unit of risk. Moderate Balanced Allocation is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,067  in Moderate Balanced Allocation on September 3, 2024 and sell it today you would earn a total of  174.00  from holding Moderate Balanced Allocation or generate 16.31% return on investment over 90 days.

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

Investment Quality Bond  vs.  Moderate Balanced Allocation

Investment Quality Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Moderate Balanced

Risk-Adjusted Performance

17 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Moderate Balanced Allocation are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Moderate Balanced may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Investment Quality and Moderate Balanced

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

The idea behind Investment Quality Bond and Moderate Balanced Allocation 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.