Correlation Between Materials Portfolio and Large Cap

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

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

Diversification Opportunities for Materials Portfolio and Large Cap

0.92

Correlation Coefficient

Materials Portfolio  Large Cap

Almost no diversification

The 3 months correlation between Materials and Large is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Materials Portfolio Fidelity 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 Materials Portfolio 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 Materials Portfolio Fidelity 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 Materials Portfolio i.e., Materials Portfolio and Large Cap go up and down completely randomly.

Pair Corralation between Materials Portfolio and Large Cap

Assuming the 90 days horizon Materials Portfolio Fidelity is expected to generate 0.48 times more return on investment than Large Cap. However, Materials Portfolio Fidelity is 2.08 times less risky than Large Cap. It trades about -0.18 of its potential returns per unit of risk. Large Cap E is currently generating about -0.14 per unit of risk. If you would invest  10,121  in Materials Portfolio Fidelity on November 29, 2024 and sell it today you would lose (1,355) from holding Materials Portfolio Fidelity or give up 13.39% of portfolio value over 90 days.

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

Materials Portfolio Fidelity  vs.  Large Cap E

Materials Portfolio

Risk-Adjusted Performance

Very Weak

Over the last 90 days Materials Portfolio Fidelity 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 technical and fundamental indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Large Cap E

Risk-Adjusted Performance

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 March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Materials Portfolio and Large Cap

The main advantage of trading using opposite Materials Portfolio and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Materials Portfolio 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 Materials Portfolio Fidelity 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..