Correlation Between Midcap Growth and Largecap

Can any of the company-specific risk be diversified away by investing in both Midcap Growth 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 Midcap Growth and Largecap 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 Largecap Sp 500, you can compare the effects of market volatilities on Midcap Growth 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 Midcap Growth with a short position of Largecap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Midcap Growth and Largecap.

Diversification Opportunities for Midcap Growth and Largecap

0.96

Correlation Coefficient

Midcap Growth  Largecap

Almost no diversification

The 3 months correlation between Midcap and Largecap is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Midcap Growth 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 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 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 Midcap Growth i.e., Midcap Growth and Largecap go up and down completely randomly.

Pair Corralation between Midcap Growth and Largecap

Assuming the 90 days horizon Midcap Growth Fund is expected to generate 1.33 times more return on investment than Largecap. However, Midcap Growth is 1.33 times more volatile than Largecap Sp 500. It trades about 0.4 of its potential returns per unit of risk. Largecap Sp 500 is currently generating about 0.21 per unit of risk. If you would invest  986.00  in Midcap Growth Fund on September 4, 2024 and sell it today you would earn a total of  266.00  from holding Midcap Growth Fund or generate 26.98% return on investment over 90 days.

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

Midcap Growth Fund  vs.  Largecap Sp 500

Midcap Growth

Risk-Adjusted Performance

31 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Midcap Growth Fund are ranked lower than 31 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Midcap Growth showed solid returns over the last few months and may actually be approaching a breakup point.

Largecap Sp 500

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Sp 500 are ranked lower than 16 (%) 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 Midcap Growth and Largecap

The main advantage of trading using opposite Midcap Growth and Largecap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Midcap Growth 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 Midcap Growth 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.