Correlation Between Multifactor Equity and Select Equity

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

Diversification Opportunities for Multifactor Equity and Select Equity

1.0

Correlation Coefficient

Multifactor Equity  Select Equity

No risk reduction

The 3 months correlation between Multifactor and Select is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Multifactor Equity Fund and Select Equity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Equity 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 Select Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Equity has no effect on the direction of Multifactor Equity i.e., Multifactor Equity and Select Equity go up and down completely randomly.

Pair Corralation between Multifactor Equity and Select Equity

Assuming the 90 days horizon Multifactor Equity is expected to generate 1.02 times less return on investment than Select Equity. But when comparing it to its historical volatility, Multifactor Equity Fund is 1.0 times less risky than Select Equity. It trades about 0.29 of its potential returns per unit of risk. Select Equity Fund is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  1,439  in Select Equity Fund on April 29, 2025 and sell it today you would earn a total of  215.00  from holding Select Equity Fund or generate 14.94% 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.  Select Equity 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 Equity showed solid returns over the last few months and may actually be approaching a breakup point.

Select Equity

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Select 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, Select Equity showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Multifactor Equity and Select Equity

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

The idea behind Multifactor Equity Fund and Select 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.

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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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.