Correlation Between Meridian Equity and Meridian Small

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

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

Diversification Opportunities for Meridian Equity and Meridian Small

0.73

Correlation Coefficient

Meridian Equity  Meridian Small

Poor diversification

The 3 months correlation between Meridian and Meridian is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Meridian Equity Income and Meridian Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meridian Small Cap and Meridian Equity 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 Meridian Equity Income are associated (or correlated) with Meridian Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meridian Small Cap has no effect on the direction of Meridian Equity i.e., Meridian Equity and Meridian Small go up and down completely randomly.

Pair Corralation between Meridian Equity and Meridian Small

Assuming the 90 days horizon Meridian Equity Income is expected to generate 0.57 times more return on investment than Meridian Small. However, Meridian Equity Income is 1.74 times less risky than Meridian Small. It trades about 0.0 of its potential returns per unit of risk. Meridian Small Cap is currently generating about -0.17 per unit of risk. If you would invest  1,201  in Meridian Equity Income on December 30, 2024 and sell it today you would lose (1.00) from holding Meridian Equity Income or give up 0.08% of portfolio value over 90 days.

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

Meridian Equity Income  vs.  Meridian Small Cap

Meridian Equity Income

Risk-Adjusted Performance

Very Weak

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

Meridian Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Meridian Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental 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 Meridian Equity and Meridian Small

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

The idea behind Meridian Equity Income and Meridian Small Cap 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.