Correlation Between Short Duration and Multifactor

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

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

Diversification Opportunities for Short Duration and Multifactor

0.57

Correlation Coefficient

Short Duration  Multifactor

Very weak diversification

The 3 months correlation between Short and Multifactor is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Short Duration Bond and Multifactor Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Multifactor Equity and Short Duration 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 Duration Bond are associated (or correlated) with Multifactor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Multifactor Equity has no effect on the direction of Short Duration i.e., Short Duration and Multifactor go up and down completely randomly.

Pair Corralation between Short Duration and Multifactor

Assuming the 90 days horizon Short Duration is expected to generate 5.27 times less return on investment than Multifactor. But when comparing it to its historical volatility, Short Duration Bond is 6.26 times less risky than Multifactor. It trades about 0.2 of its potential returns per unit of risk. Multifactor Equity Fund is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,549  in Multifactor Equity Fund on May 15, 2025 and sell it today you would earn a total of  108.00  from holding Multifactor Equity Fund or generate 6.97% return on investment over 90 days.

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

Short Duration Bond  vs.  Multifactor Equity Fund

Short Duration Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Duration Bond are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Short Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Multifactor Equity

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Multifactor may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Short Duration and Multifactor

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

The idea behind Short Duration Bond and Multifactor Equity 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.