Correlation Between Short Term and Intermediate-term

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

By analyzing existing cross correlation between Short Term Bond Fund and Intermediate Term Bond Fund, you can compare the effects of market volatilities on Short Term and Intermediate-term 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 Intermediate-term. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Term and Intermediate-term.

Diversification Opportunities for Short Term and Intermediate-term

0.87

Correlation Coefficient

Short Term  Intermediate-term

Very poor diversification

The 3 months correlation between Short and Intermediate-term is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Bond Fund and Intermediate Term Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Intermediate Term Bond 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 Bond Fund are associated (or correlated) with Intermediate-term. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Intermediate Term Bond has no effect on the direction of Short Term i.e., Short Term and Intermediate-term go up and down completely randomly.

Pair Corralation between Short Term and Intermediate-term

Assuming the 90 days horizon Short Term Bond Fund is expected to generate 0.37 times more return on investment than Intermediate-term. However, Short Term Bond Fund is 2.7 times less risky than Intermediate-term. It trades about -0.03 of its potential returns per unit of risk. Intermediate Term Bond Fund is currently generating about -0.06 per unit of risk. If you would invest  913.00  in Short Term Bond Fund on January 28, 2025 and sell it today you would lose (1.00) from holding Short Term Bond Fund or give up 0.11% of portfolio value over 90 days.

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

Short Term Bond Fund  vs.  Intermediate Term Bond Fund

Short Term Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Bond Fund are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Short Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Intermediate Term Bond

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Intermediate Term Bond Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Intermediate-term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short Term and Intermediate-term

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

The idea behind Short Term Bond Fund and Intermediate Term Bond 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.