Correlation Between Morningstar Defensive and Balanced Allocation

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

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

Diversification Opportunities for Morningstar Defensive and Balanced Allocation

0.86

Correlation Coefficient

Morningstar Defensive  Balanced Allocation

Very poor diversification

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

Pair Corralation between Morningstar Defensive and Balanced Allocation

Assuming the 90 days horizon Morningstar Defensive is expected to generate 5.67 times less return on investment than Balanced Allocation. But when comparing it to its historical volatility, Morningstar Defensive Bond is 2.2 times less risky than Balanced Allocation. It trades about 0.08 of its potential returns per unit of risk. Balanced Allocation Fund is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  1,170  in Balanced Allocation Fund on May 5, 2025 and sell it today you would earn a total of  56.00  from holding Balanced Allocation Fund or generate 4.79% return on investment over 90 days.

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

Morningstar Defensive Bond  vs.  Balanced Allocation Fund

Morningstar Defensive

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Morningstar Defensive Bond are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Morningstar Defensive is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Balanced Allocation

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Allocation Fund are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Balanced 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 Morningstar Defensive and Balanced Allocation

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

The idea behind Morningstar Defensive Bond and Balanced Allocation Fund 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.