Correlation Between Sustainable Equity and Large Cap

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

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

Diversification Opportunities for Sustainable Equity and Large Cap

0.72

Correlation Coefficient

Sustainable Equity  Large Cap

Poor diversification

The 3 months correlation between Sustainable and Large is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Sustainable Equity Fund and Large Cap E in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap E and Sustainable Equity 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 Sustainable Equity Fund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap E has no effect on the direction of Sustainable Equity i.e., Sustainable Equity and Large Cap go up and down completely randomly.

Pair Corralation between Sustainable Equity and Large Cap

Assuming the 90 days horizon Sustainable Equity Fund is expected to generate 0.72 times more return on investment than Large Cap. However, Sustainable Equity Fund is 1.39 times less risky than Large Cap. It trades about 0.08 of its potential returns per unit of risk. Large Cap E is currently generating about 0.02 per unit of risk. If you would invest  3,811  in Sustainable Equity Fund on September 24, 2024 and sell it today you would earn a total of  1,526  from holding Sustainable Equity Fund or generate 40.04% return on investment over 90 days.

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

Sustainable Equity Fund  vs.  Large Cap E

Sustainable Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Large Cap E

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Large Cap E has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Sustainable Equity and Large Cap

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

The idea behind Sustainable Equity Fund and Large Cap E 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.