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

0.76

Correlation Coefficient

Blue Chip  Largecap

Poor diversification

The 3 months correlation between Blue and Largecap is 0.76. 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 is expected to generate 1.15 times less return on investment than Largecap. In addition to that, Blue Chip is 1.25 times more volatile than Largecap Sp 500. It trades about 0.13 of its total potential returns per unit of risk. Largecap Sp 500 is currently generating about 0.19 per unit of volatility. If you would invest  2,758  in Largecap Sp 500 on September 12, 2024 and sell it today you would earn a total of  225.00  from holding Largecap Sp 500 or generate 8.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	85.71%
Values	Daily Returns

Blue Chip Fund  vs.  Largecap Sp 500

Blue Chip Fund

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Blue Chip Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly weak technical and fundamental indicators, Blue Chip may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Largecap Sp 500

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Sp 500 are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Largecap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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.

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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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.