Correlation Between Core Fixed and Inflation Linked

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

By analyzing existing cross correlation between Core Fixed Income and Inflation Linked Fixed Income, you can compare the effects of market volatilities on Core Fixed and Inflation Linked 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 Core Fixed with a short position of Inflation Linked. Check out your portfolio center. Please also check ongoing floating volatility patterns of Core Fixed and Inflation Linked.

Diversification Opportunities for Core Fixed and Inflation Linked

0.66

Correlation Coefficient

Core Fixed  Inflation Linked

Poor diversification

The 3 months correlation between Core and Inflation is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Core Fixed Income and Inflation Linked Fixed Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inflation Linked Fixed and Core Fixed 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 Core Fixed Income are associated (or correlated) with Inflation Linked. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inflation Linked Fixed has no effect on the direction of Core Fixed i.e., Core Fixed and Inflation Linked go up and down completely randomly.

Pair Corralation between Core Fixed and Inflation Linked

Assuming the 90 days horizon Core Fixed is expected to generate 1.08 times less return on investment than Inflation Linked. In addition to that, Core Fixed is 1.02 times more volatile than Inflation Linked Fixed Income. It trades about 0.1 of its total potential returns per unit of risk. Inflation Linked Fixed Income is currently generating about 0.11 per unit of volatility. If you would invest  816.00  in Inflation Linked Fixed Income on April 23, 2025 and sell it today you would earn a total of  16.00  from holding Inflation Linked Fixed Income or generate 1.96% return on investment over 90 days.

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

Core Fixed Income  vs.  Inflation Linked Fixed Income

Core Fixed Income

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Core Fixed Income are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Core Fixed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Inflation Linked Fixed

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Inflation Linked Fixed Income are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Inflation Linked is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Core Fixed and Inflation Linked

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

The idea behind Core Fixed Income and Inflation Linked Fixed Income 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.