Correlation Between Money Market and Largecap

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

By analyzing existing cross correlation between Money Market Obligations and Largecap Sp 500, you can compare the effects of market volatilities on Money Market and Largecap 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 Money Market with a short position of Largecap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Money Market and Largecap.

Diversification Opportunities for Money Market and Largecap

0.0

Correlation Coefficient

Money Market  Largecap

Pay attention - limited upside

The 3 months correlation between Money and Largecap is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Money Market Obligations and Largecap Sp 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Largecap Sp 500 and Money Market 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 Money Market Obligations are associated (or correlated) with Largecap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Largecap Sp 500 has no effect on the direction of Money Market i.e., Money Market and Largecap go up and down completely randomly.

Pair Corralation between Money Market and Largecap

Assuming the 90 days horizon Money Market is expected to generate 10.8 times less return on investment than Largecap. But when comparing it to its historical volatility, Money Market Obligations is 8.82 times less risky than Largecap. It trades about 0.09 of its potential returns per unit of risk. Largecap Sp 500 is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,330  in Largecap Sp 500 on October 9, 2024 and sell it today you would earn a total of  547.00  from holding Largecap Sp 500 or generate 23.48% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Money Market Obligations  vs.  Largecap Sp 500

Money Market Obligations

Risk-Adjusted Performance

0 of 100

Very Weak

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

Largecap Sp 500

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Sp 500 are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Largecap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Money Market and Largecap

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

The idea behind Money Market Obligations and Largecap Sp 500 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.