Correlation Between Large Cap and Longshort Portfolio

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

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

Diversification Opportunities for Large Cap and Longshort Portfolio

0.91

Correlation Coefficient

Large Cap  Longshort Portfolio

Almost no diversification

The 3 months correlation between Large and Longshort is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap E and Longshort Portfolio Longshort in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Longshort Portfolio and Large Cap 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 Large Cap E are associated (or correlated) with Longshort Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Longshort Portfolio has no effect on the direction of Large Cap i.e., Large Cap and Longshort Portfolio go up and down completely randomly.

Pair Corralation between Large Cap and Longshort Portfolio

Assuming the 90 days horizon Large Cap is expected to generate 1.29 times less return on investment than Longshort Portfolio. In addition to that, Large Cap is 2.28 times more volatile than Longshort Portfolio Longshort. It trades about 0.01 of its total potential returns per unit of risk. Longshort Portfolio Longshort is currently generating about 0.04 per unit of volatility. If you would invest  1,228  in Longshort Portfolio Longshort on October 7, 2024 and sell it today you would earn a total of  117.00  from holding Longshort Portfolio Longshort or generate 9.53% return on investment over 90 days.

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

Large Cap E  vs.  Longshort Portfolio Longshort

Large Cap E

Risk-Adjusted Performance

0 of 100

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

Longshort Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Large Cap and Longshort Portfolio

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

The idea behind Large Cap E and Longshort Portfolio Longshort 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.