Correlation Between Equity Series and Large Cap

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

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

Diversification Opportunities for Equity Series and Large Cap

0.5

Correlation Coefficient

Equity Series  Large Cap

Very weak diversification

The 3 months correlation between Equity and Large is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Equity Series Class and Large Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Fund and Equity Series 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 Equity Series Class 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 Fund has no effect on the direction of Equity Series i.e., Equity Series and Large Cap go up and down completely randomly.

Pair Corralation between Equity Series and Large Cap

Assuming the 90 days horizon Equity Series Class is expected to under-perform the Large Cap. In addition to that, Equity Series is 1.22 times more volatile than Large Cap Fund. It trades about -0.11 of its total potential returns per unit of risk. Large Cap Fund is currently generating about 0.04 per unit of volatility. If you would invest  1,454  in Large Cap Fund on December 29, 2024 and sell it today you would earn a total of  26.00  from holding Large Cap Fund or generate 1.79% return on investment over 90 days.

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

Equity Series Class  vs.  Large Cap Fund

Equity Series Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Equity Series Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Large Cap Fund

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Fund are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Series and Large Cap

The main advantage of trading using opposite Equity Series and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Series 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 Equity Series Class and Large Cap 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.

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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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.