Can any of the company-specific risk be diversified away by investing in both United States and Build Funds 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 United States and Build Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between United States Steel and Build Funds Trust, you can compare the effects of market volatilities on United States and Build Funds 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 United States with a short position of Build Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of United States and Build Funds.
Diversification Opportunities for United States and Build Funds
The 3 months correlation between United and Build is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding United States Steel and Build Funds Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Build Funds Trust and United States 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 United States Steel are associated (or correlated) with Build Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Build Funds Trust has no effect on the direction of United States i.e., United States and Build Funds go up and down completely randomly.
Pair Corralation between United States and Build Funds
Taking into account the 90-day investment horizon United States Steel is expected to generate 11.27 times more return on investment than Build Funds. However, United States is 11.27 times more volatile than Build Funds Trust. It trades about 0.06 of its potential returns per unit of risk. Build Funds Trust is currently generating about 0.04 per unit of risk. If you would invest 2,561 in United States Steel on September 7, 2023 and sell it today you would earn a total of 1,020 from holding United States Steel or generate 39.83% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in United States Steel are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain basic indicators, United States showed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Build Funds Trust are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong forward indicators, Build Funds is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite United States and Build Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United States position performs unexpectedly, Build Funds 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 Build Funds will offset losses from the drop in Build Funds' long position.
The idea behind United States Steel and Build Funds Trust 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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