Correlation Between Multifactor and Moderate Strategy

Can any of the company-specific risk be diversified away by investing in both Multifactor and Moderate 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 and Moderate 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 Moderate Strategy Fund, you can compare the effects of market volatilities on Multifactor and Moderate 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 with a short position of Moderate Strategy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Multifactor and Moderate Strategy.

Diversification Opportunities for Multifactor and Moderate Strategy

0.97

Correlation Coefficient

Multifactor  Moderate Strategy

Almost no diversification

The 3 months correlation between Multifactor and Moderate is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Multifactor Equity Fund and Moderate Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Strategy and Multifactor 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 Moderate Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Strategy has no effect on the direction of Multifactor i.e., Multifactor and Moderate Strategy go up and down completely randomly.

Pair Corralation between Multifactor and Moderate Strategy

Assuming the 90 days horizon Multifactor Equity Fund is expected to generate 2.26 times more return on investment than Moderate Strategy. However, Multifactor is 2.26 times more volatile than Moderate Strategy Fund. It trades about 0.29 of its potential returns per unit of risk. Moderate Strategy Fund is currently generating about 0.28 per unit of risk. If you would invest  1,432  in Multifactor Equity Fund on April 24, 2025 and sell it today you would earn a total of  207.00  from holding Multifactor Equity Fund or generate 14.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.39%
Values	Daily Returns

Multifactor Equity Fund  vs.  Moderate 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 22 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Multifactor showed solid returns over the last few months and may actually be approaching a breakup point.

Moderate Strategy

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Moderate Strategy Fund are ranked lower than 21 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Moderate Strategy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Multifactor and Moderate Strategy

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

The idea behind Multifactor Equity Fund and Moderate 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.