Correlation Between Amazon and Largecap

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

By analyzing existing cross correlation between Amazon Inc and Largecap Sp 500, you can compare the effects of market volatilities on Amazon and Largecap 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 Amazon with a short position of Largecap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amazon and Largecap.

Diversification Opportunities for Amazon and Largecap

0.86

Correlation Coefficient

Amazon  Largecap

Very poor diversification

The 3 months correlation between Amazon and Largecap is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Largecap Sp 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Largecap Sp 500 and Amazon 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 Amazon Inc are associated (or correlated) with Largecap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Largecap Sp 500 has no effect on the direction of Amazon i.e., Amazon and Largecap go up and down completely randomly.

Pair Corralation between Amazon and Largecap

Given the investment horizon of 90 days Amazon Inc is expected to generate 2.32 times more return on investment than Largecap. However, Amazon is 2.32 times more volatile than Largecap Sp 500. It trades about 0.1 of its potential returns per unit of risk. Largecap Sp 500 is currently generating about 0.1 per unit of risk. If you would invest  9,158  in Amazon Inc on September 4, 2024 and sell it today you would earn a total of  12,186  from holding Amazon Inc or generate 133.06% return on investment over 90 days.

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

Amazon Inc  vs.  Largecap Sp 500

Amazon Inc

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Amazon displayed solid returns over the last few months and may actually be approaching a breakup point.

Largecap Sp 500

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Sp 500 are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Largecap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Amazon and Largecap

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

The idea behind Amazon Inc and Largecap Sp 500 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.