Correlation Between Multifactor Equity and Balanced Strategy

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

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

Diversification Opportunities for Multifactor Equity and Balanced Strategy

0.99

Correlation Coefficient

Multifactor Equity  Balanced Strategy

No risk reduction

The 3 months correlation between Multifactor and Balanced is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Multifactor Equity Fund and Balanced Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Strategy and Multifactor Equity 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 Multifactor Equity Fund are associated (or correlated) with Balanced Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Strategy has no effect on the direction of Multifactor Equity i.e., Multifactor Equity and Balanced Strategy go up and down completely randomly.

Pair Corralation between Multifactor Equity and Balanced Strategy

Assuming the 90 days horizon Multifactor Equity Fund is expected to generate 1.74 times more return on investment than Balanced Strategy. However, Multifactor Equity is 1.74 times more volatile than Balanced Strategy Fund. It trades about 0.3 of its potential returns per unit of risk. Balanced Strategy Fund is currently generating about 0.29 per unit of risk. If you would invest  1,418  in Multifactor Equity Fund on April 26, 2025 and sell it today you would earn a total of  211.00  from holding Multifactor Equity Fund or generate 14.88% return on investment over 90 days.

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

Multifactor Equity Fund  vs.  Balanced Strategy Fund

Multifactor Equity

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Multifactor Equity Fund are ranked lower than 23 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Multifactor Equity showed solid returns over the last few months and may actually be approaching a breakup point.

Balanced Strategy

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Strategy Fund are ranked lower than 23 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Balanced Strategy may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Multifactor Equity and Balanced Strategy

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

The idea behind Multifactor Equity Fund and Balanced Strategy 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.

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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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .