Correlation Between Fundamental Large and Ultrashort Small-cap

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

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

Diversification Opportunities for Fundamental Large and Ultrashort Small-cap

-0.69

Correlation Coefficient

Fundamental Large  Ultrashort Small-cap

Excellent diversification

The 3 months correlation between Fundamental and Ultrashort is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding Fundamental Large Cap and Ultrashort Small Cap Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultrashort Small Cap and Fundamental Large 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 Fundamental Large Cap are associated (or correlated) with Ultrashort Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultrashort Small Cap has no effect on the direction of Fundamental Large i.e., Fundamental Large and Ultrashort Small-cap go up and down completely randomly.

Pair Corralation between Fundamental Large and Ultrashort Small-cap

Assuming the 90 days horizon Fundamental Large Cap is expected to under-perform the Ultrashort Small-cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Fundamental Large Cap is 2.34 times less risky than Ultrashort Small-cap. The mutual fund trades about -0.07 of its potential returns per unit of risk. The Ultrashort Small Cap Profund is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  3,997  in Ultrashort Small Cap Profund on December 25, 2024 and sell it today you would earn a total of  699.00  from holding Ultrashort Small Cap Profund or generate 17.49% return on investment over 90 days.

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

Fundamental Large Cap  vs.  Ultrashort Small Cap Profund

Fundamental Large Cap

Risk-Adjusted Performance

Very Weak

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

Ultrashort Small Cap

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Ultrashort Small Cap Profund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Ultrashort Small-cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fundamental Large and Ultrashort Small-cap

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

The idea behind Fundamental Large Cap and Ultrashort Small Cap Profund 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.