Correlation Between Nasdaq and Mid Cap

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

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

Diversification Opportunities for Nasdaq and Mid Cap

0.94

Correlation Coefficient

Nasdaq  Mid Cap

Almost no diversification

The 3 months correlation between Nasdaq and Mid is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq Inc and Mid Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Growth and Nasdaq 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 Nasdaq Inc are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Growth has no effect on the direction of Nasdaq i.e., Nasdaq and Mid Cap go up and down completely randomly.

Pair Corralation between Nasdaq and Mid Cap

Given the investment horizon of 90 days Nasdaq is expected to generate 2.88 times less return on investment than Mid Cap. But when comparing it to its historical volatility, Nasdaq Inc is 1.45 times less risky than Mid Cap. It trades about 0.04 of its potential returns per unit of risk. Mid Cap Growth is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,040  in Mid Cap Growth on September 21, 2024 and sell it today you would earn a total of  1,220  from holding Mid Cap Growth or generate 117.31% return on investment over 90 days.

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

Nasdaq Inc  vs.  Mid Cap Growth

Nasdaq Inc

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq Inc are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Nasdaq is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Mid Cap Growth

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Growth are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Mid Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Nasdaq and Mid Cap

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

The idea behind Nasdaq Inc and Mid Cap Growth 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.