Correlation Between Rational Defensive and Mid Cap

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

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

Diversification Opportunities for Rational Defensive and Mid Cap

0.78

Correlation Coefficient

Rational Defensive  Mid Cap

Poor diversification

The 3 months correlation between Rational and Mid is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Rational Defensive Growth and Mid Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Growth and Rational Defensive 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 Rational Defensive Growth are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Growth has no effect on the direction of Rational Defensive i.e., Rational Defensive and Mid Cap go up and down completely randomly.

Pair Corralation between Rational Defensive and Mid Cap

Assuming the 90 days horizon Rational Defensive Growth is expected to generate 0.67 times more return on investment than Mid Cap. However, Rational Defensive Growth is 1.49 times less risky than Mid Cap. It trades about -0.01 of its potential returns per unit of risk. Mid Cap Growth is currently generating about -0.09 per unit of risk. If you would invest  4,062  in Rational Defensive Growth on December 2, 2024 and sell it today you would lose (33.00) from holding Rational Defensive Growth or give up 0.81% of portfolio value over 90 days.

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

Rational Defensive Growth  vs.  Mid Cap Growth

Rational Defensive Growth

Risk-Adjusted Performance

Very Weak

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

Mid Cap Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mid Cap Growth 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.

Pair Trading with Rational Defensive and Mid Cap

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

The idea behind Rational Defensive Growth and Mid Cap Growth 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.