Correlation Between Large Cap and Ultrashort Small

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

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

Diversification Opportunities for Large Cap and Ultrashort Small

-0.68

Correlation Coefficient

Large Cap  Ultrashort Small

Excellent diversification

The 3 months correlation between Large and Ultrashort is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Growth Profund 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 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 Growth Profund are associated (or correlated) with Ultrashort Small. 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 Large Cap i.e., Large Cap and Ultrashort Small go up and down completely randomly.

Pair Corralation between Large Cap and Ultrashort Small

Assuming the 90 days horizon Large Cap is expected to generate 5.67 times less return on investment than Ultrashort Small. But when comparing it to its historical volatility, Large Cap Growth Profund is 2.07 times less risky than Ultrashort Small. It trades about 0.12 of its potential returns per unit of risk. Ultrashort Small Cap Profund is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  3,661  in Ultrashort Small Cap Profund on September 30, 2024 and sell it today you would earn a total of  609.00  from holding Ultrashort Small Cap Profund or generate 16.63% return on investment over 90 days.

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

Large Cap Growth Profund  vs.  Ultrashort Small Cap Profund

Large Cap Growth

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Growth Profund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ultrashort Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ultrashort Small Cap Profund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Ultrashort Small 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 Ultrashort Small

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

The idea behind Large Cap Growth Profund 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.

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.