Correlation Between Short Term and Equity Income

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

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

Diversification Opportunities for Short Term and Equity Income

0.71

Correlation Coefficient

Short Term  Equity Income

Poor diversification

The 3 months correlation between Short and Equity is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Short Term 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 Short Term Government Fund are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Short Term i.e., Short Term and Equity Income go up and down completely randomly.

Pair Corralation between Short Term and Equity Income

Assuming the 90 days horizon Short Term is expected to generate 32.59 times less return on investment than Equity Income. But when comparing it to its historical volatility, Short Term Government Fund is 5.38 times less risky than Equity Income. It trades about 0.03 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  827.00  in Equity Income Fund on May 1, 2025 and sell it today you would earn a total of  62.00  from holding Equity Income Fund or generate 7.5% return on investment over 90 days.

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

Short Term Government Fund  vs.  Equity Income Fund

Short Term Government

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Income

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Pair Trading with Short Term and Equity Income

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

The idea behind Short Term Government Fund and Equity Income 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.