Correlation Between Inflation-linked and Principal Lifetime

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

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

Diversification Opportunities for Inflation-linked and Principal Lifetime

-0.29

Correlation Coefficient

Inflation-linked  Principal Lifetime

Very good diversification

The 3 months correlation between Inflation-linked and Principal is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Inflation Linked Fixed Income and Principal Lifetime Hybrid in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Lifetime Hybrid and Inflation-linked 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 Inflation Linked Fixed Income are associated (or correlated) with Principal Lifetime. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Lifetime Hybrid has no effect on the direction of Inflation-linked i.e., Inflation-linked and Principal Lifetime go up and down completely randomly.

Pair Corralation between Inflation-linked and Principal Lifetime

Assuming the 90 days horizon Inflation Linked Fixed Income is expected to generate 0.58 times more return on investment than Principal Lifetime. However, Inflation Linked Fixed Income is 1.72 times less risky than Principal Lifetime. It trades about -0.02 of its potential returns per unit of risk. Principal Lifetime Hybrid is currently generating about -0.11 per unit of risk. If you would invest  828.00  in Inflation Linked Fixed Income on January 23, 2025 and sell it today you would lose (2.00) from holding Inflation Linked Fixed Income or give up 0.24% of portfolio value over 90 days.

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

Inflation Linked Fixed Income  vs.  Principal Lifetime Hybrid

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 7 (%) 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.

Principal Lifetime Hybrid

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Lifetime Hybrid has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Principal Lifetime is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Inflation-linked and Principal Lifetime

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

The idea behind Inflation Linked Fixed Income and Principal Lifetime Hybrid 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.