Correlation Between Midcap Growth and Diversified International

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

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

Diversification Opportunities for Midcap Growth and Diversified International

0.5

Correlation Coefficient

Midcap Growth  Diversified International

Very weak diversification

The 3 months correlation between Midcap and Diversified is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Midcap Growth Fund and Diversified International Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified International and Midcap Growth 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 Midcap Growth Fund are associated (or correlated) with Diversified International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified International has no effect on the direction of Midcap Growth i.e., Midcap Growth and Diversified International go up and down completely randomly.

Pair Corralation between Midcap Growth and Diversified International

Assuming the 90 days horizon Midcap Growth Fund is expected to under-perform the Diversified International. In addition to that, Midcap Growth is 1.65 times more volatile than Diversified International Fund. It trades about -0.12 of its total potential returns per unit of risk. Diversified International Fund is currently generating about 0.06 per unit of volatility. If you would invest  1,364  in Diversified International Fund on November 28, 2024 and sell it today you would earn a total of  36.00  from holding Diversified International Fund or generate 2.64% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.31%
Values	Daily Returns

Midcap Growth Fund  vs.  Diversified International Fund

Midcap Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Midcap Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Diversified International

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Diversified International Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking indicators, Diversified International is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Midcap Growth and Diversified International

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

The idea behind Midcap Growth Fund and Diversified International Fund 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.