Correlation Between Fidelity 500 and Pax Large

Can any of the company-specific risk be diversified away by investing in both Fidelity 500 and Pax Large 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 Fidelity 500 and Pax Large into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Fidelity 500 Index and Pax Large Cap, you can compare the effects of market volatilities on Fidelity 500 and Pax Large 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 Fidelity 500 with a short position of Pax Large. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fidelity 500 and Pax Large.

Diversification Opportunities for Fidelity 500 and Pax Large

0.5

Correlation Coefficient

Fidelity 500  Pax Large

Very weak diversification

The 3 months correlation between Fidelity and Pax is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Fidelity 500 Index and Pax Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pax Large Cap and Fidelity 500 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 Fidelity 500 Index are associated (or correlated) with Pax Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pax Large Cap has no effect on the direction of Fidelity 500 i.e., Fidelity 500 and Pax Large go up and down completely randomly.

Pair Corralation between Fidelity 500 and Pax Large

Assuming the 90 days horizon Fidelity 500 Index is expected to generate 1.04 times more return on investment than Pax Large. However, Fidelity 500 is 1.04 times more volatile than Pax Large Cap. It trades about -0.06 of its potential returns per unit of risk. Pax Large Cap is currently generating about -0.09 per unit of risk. If you would invest  20,583  in Fidelity 500 Index on December 20, 2024 and sell it today you would lose (824.00) from holding Fidelity 500 Index or give up 4.0% of portfolio value over 90 days.

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

Fidelity 500 Index  vs.  Pax Large Cap

Fidelity 500 Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fidelity 500 Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Fidelity 500 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pax Large Cap

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Fidelity 500 and Pax Large

The main advantage of trading using opposite Fidelity 500 and Pax Large positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fidelity 500 position performs unexpectedly, Pax Large 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 Pax Large will offset losses from the drop in Pax Large's long position.

The idea behind Fidelity 500 Index and Pax Large Cap 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.