Correlation Between Large Cap and Utilities Ultrasector

Can any of the company-specific risk be diversified away by investing in both Large Cap and Utilities Ultrasector 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 Utilities Ultrasector 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 Utilities Ultrasector Profund, you can compare the effects of market volatilities on Large Cap and Utilities Ultrasector 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 Utilities Ultrasector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Utilities Ultrasector.

Diversification Opportunities for Large Cap and Utilities Ultrasector

-0.54

Correlation Coefficient

Large Cap  Utilities Ultrasector

Excellent diversification

The 3 months correlation between Large and Utilities is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Growth Profund and Utilities Ultrasector Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Utilities Ultrasector 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 Utilities Ultrasector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Utilities Ultrasector has no effect on the direction of Large Cap i.e., Large Cap and Utilities Ultrasector go up and down completely randomly.

Pair Corralation between Large Cap and Utilities Ultrasector

Assuming the 90 days horizon Large Cap Growth Profund is expected to under-perform the Utilities Ultrasector. But the mutual fund apears to be less risky and, when comparing its historical volatility, Large Cap Growth Profund is 1.04 times less risky than Utilities Ultrasector. The mutual fund trades about -0.11 of its potential returns per unit of risk. The Utilities Ultrasector Profund is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  7,068  in Utilities Ultrasector Profund on October 15, 2024 and sell it today you would lose (153.00) from holding Utilities Ultrasector Profund or give up 2.16% of portfolio value over 90 days.

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

Large Cap Growth Profund  vs.  Utilities Ultrasector Profund

Large Cap Growth

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Growth Profund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Utilities Ultrasector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Utilities Ultrasector Profund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward 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 Large Cap and Utilities Ultrasector

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

The idea behind Large Cap Growth Profund and Utilities Ultrasector 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.