Correlation Between Short-term Treasury and Versatile Bond

Can any of the company-specific risk be diversified away by investing in both Short-term Treasury and Versatile Bond 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 Short-term Treasury and Versatile Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Short Term Treasury Portfolio and Versatile Bond Portfolio, you can compare the effects of market volatilities on Short-term Treasury and Versatile Bond 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 Short-term Treasury with a short position of Versatile Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Treasury and Versatile Bond.

Diversification Opportunities for Short-term Treasury and Versatile Bond

0.95

Correlation Coefficient

Short-term Treasury  Versatile Bond

Almost no diversification

The 3 months correlation between Short-term and Versatile is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Treasury Portfolio and Versatile Bond Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Versatile Bond Portfolio and Short-term Treasury 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 Short Term Treasury Portfolio are associated (or correlated) with Versatile Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Versatile Bond Portfolio has no effect on the direction of Short-term Treasury i.e., Short-term Treasury and Versatile Bond go up and down completely randomly.

Pair Corralation between Short-term Treasury and Versatile Bond

Assuming the 90 days horizon Short Term Treasury Portfolio is expected to generate 0.39 times more return on investment than Versatile Bond. However, Short Term Treasury Portfolio is 2.59 times less risky than Versatile Bond. It trades about -0.08 of its potential returns per unit of risk. Versatile Bond Portfolio is currently generating about -0.11 per unit of risk. If you would invest  6,659  in Short Term Treasury Portfolio on August 16, 2024 and sell it today you would lose (6.00) from holding Short Term Treasury Portfolio or give up 0.09% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.65%
Values	Daily Returns

Short Term Treasury Portfolio  vs.  Versatile Bond Portfolio

Short Term Treasury

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Treasury Portfolio are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Short-term Treasury is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Versatile Bond Portfolio

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Versatile Bond Portfolio are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Versatile Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short-term Treasury and Versatile Bond

The main advantage of trading using opposite Short-term Treasury and Versatile Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Treasury position performs unexpectedly, Versatile Bond 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 Versatile Bond will offset losses from the drop in Versatile Bond's long position.

The idea behind Short Term Treasury Portfolio and Versatile Bond Portfolio 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.