Correlation Between Blue Chip and Largecap

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

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

Diversification Opportunities for Blue Chip and Largecap

0.97

Correlation Coefficient

Blue Chip  Largecap

Almost no diversification

The 3 months correlation between Blue and Largecap is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Blue Chip Fund 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 Blue Chip 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 Blue Chip Fund 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 Blue Chip i.e., Blue Chip and Largecap go up and down completely randomly.

Pair Corralation between Blue Chip and Largecap

Assuming the 90 days horizon Blue Chip Fund is expected to under-perform the Largecap. In addition to that, Blue Chip is 1.03 times more volatile than Largecap Sp 500. It trades about -0.07 of its total potential returns per unit of risk. Largecap Sp 500 is currently generating about -0.06 per unit of volatility. If you would invest  2,906  in Largecap Sp 500 on December 26, 2024 and sell it today you would lose (117.00) from holding Largecap Sp 500 or give up 4.03% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.36%
Values	Daily Returns

Blue Chip Fund  vs.  Largecap Sp 500

Blue Chip Fund

Risk-Adjusted Performance

Very Weak

Over the last 90 days Blue Chip Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Blue Chip 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

Very Weak

Over the last 90 days Largecap Sp 500 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward 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 Blue Chip and Largecap

The main advantage of trading using opposite Blue Chip and Largecap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Blue Chip 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 Blue Chip Fund 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.

Check out your portfolio center.

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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..