Correlation Between Growth Equity and Equity Index

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

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

Diversification Opportunities for Growth Equity and Equity Index

0.93

Correlation Coefficient

Growth Equity  Equity Index

Almost no diversification

The 3 months correlation between Growth and Equity is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Growth Equity Investor and Equity Index Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Index Investor and Growth Equity 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 Growth Equity Investor are associated (or correlated) with Equity Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Index Investor has no effect on the direction of Growth Equity i.e., Growth Equity and Equity Index go up and down completely randomly.

Pair Corralation between Growth Equity and Equity Index

Assuming the 90 days horizon Growth Equity Investor is expected to under-perform the Equity Index. In addition to that, Growth Equity is 1.35 times more volatile than Equity Index Investor. It trades about -0.06 of its total potential returns per unit of risk. Equity Index Investor is currently generating about -0.05 per unit of volatility. If you would invest  5,876  in Equity Index Investor on December 28, 2024 and sell it today you would lose (202.00) from holding Equity Index Investor or give up 3.44% of portfolio value over 90 days.

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

Growth Equity Investor  vs.  Equity Index Investor

Growth Equity Investor

Risk-Adjusted Performance

Very Weak

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

Equity Index Investor

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Growth Equity and Equity Index

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

The idea behind Growth Equity Investor and Equity Index Investor 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.