Correlation Between Absolute Convertible and Large Cap

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

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

Diversification Opportunities for Absolute Convertible and Large Cap

0.39

Correlation Coefficient

Absolute Convertible  Large Cap

Weak diversification

The 3 months correlation between Absolute and Large is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Absolute Convertible Arbitrage and Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Value and Absolute Convertible 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 Absolute Convertible Arbitrage 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 Value has no effect on the direction of Absolute Convertible i.e., Absolute Convertible and Large Cap go up and down completely randomly.

Pair Corralation between Absolute Convertible and Large Cap

Assuming the 90 days horizon Absolute Convertible Arbitrage is expected to generate 0.04 times more return on investment than Large Cap. However, Absolute Convertible Arbitrage is 28.33 times less risky than Large Cap. It trades about 0.54 of its potential returns per unit of risk. Large Cap Value is currently generating about -0.02 per unit of risk. If you would invest  1,070  in Absolute Convertible Arbitrage on September 12, 2024 and sell it today you would earn a total of  81.00  from holding Absolute Convertible Arbitrage or generate 7.57% return on investment over 90 days.

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

Absolute Convertible Arbitrage  vs.  Large Cap Value

Absolute Convertible

Risk-Adjusted Performance

40 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Absolute Convertible Arbitrage are ranked lower than 40 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Absolute Convertible is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Large Cap Value 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 fundamental 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 Absolute Convertible and Large Cap

The main advantage of trading using opposite Absolute Convertible and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Absolute Convertible 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 Absolute Convertible Arbitrage and Large Cap Value 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.