Correlation Between Mid Cap and Government Bond

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

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

Diversification Opportunities for Mid Cap and Government Bond

-0.53

Correlation Coefficient

Mid Cap  Government Bond

Excellent diversification

The 3 months correlation between Mid and Government is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value and Government Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Bond and Mid Cap 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 Mid Cap Value are associated (or correlated) with Government Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Bond has no effect on the direction of Mid Cap i.e., Mid Cap and Government Bond go up and down completely randomly.

Pair Corralation between Mid Cap and Government Bond

Assuming the 90 days horizon Mid Cap Value is expected to generate 2.06 times more return on investment than Government Bond. However, Mid Cap is 2.06 times more volatile than Government Bond Fund. It trades about 0.12 of its potential returns per unit of risk. Government Bond Fund is currently generating about -0.09 per unit of risk. If you would invest  1,692  in Mid Cap Value on September 4, 2024 and sell it today you would earn a total of  84.00  from holding Mid Cap Value or generate 4.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Mid Cap Value  vs.  Government Bond Fund

Mid Cap Value

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Government Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Mid Cap and Government Bond

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

The idea behind Mid Cap Value and Government 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.

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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.