Correlation Between International Equity and Large Cap

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

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

Diversification Opportunities for International Equity and Large Cap

-0.22

Correlation Coefficient

International Equity  Large Cap

Very good diversification

The 3 months correlation between International and Large is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Large Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Equity and International 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 International Equity Portfolio are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Equity has no effect on the direction of International Equity i.e., International Equity and Large Cap go up and down completely randomly.

Pair Corralation between International Equity and Large Cap

Assuming the 90 days horizon International Equity Portfolio is expected to under-perform the Large Cap. In addition to that, International Equity is 105.55 times more volatile than Large Cap Equity. It trades about -0.24 of its total potential returns per unit of risk. Large Cap Equity is currently generating about 0.22 per unit of volatility. If you would invest  2,670  in Large Cap Equity on October 6, 2024 and sell it today you would earn a total of  7.00  from holding Large Cap Equity or generate 0.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

International Equity Portfolio  vs.  Large Cap Equity

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Equity Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's essential indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Large Cap Equity

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with International Equity and Large Cap

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

The idea behind International Equity Portfolio and Large Cap Equity 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.