Correlation Between International Equity and Midcap Growth

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

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

Diversification Opportunities for International Equity and Midcap Growth

-0.65

Correlation Coefficient

International Equity  Midcap Growth

Excellent diversification

The 3 months correlation between International and Midcap is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Index and Midcap Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Midcap Growth and International Equity 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 International Equity Index are associated (or correlated) with Midcap Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Midcap Growth has no effect on the direction of International Equity i.e., International Equity and Midcap Growth go up and down completely randomly.

Pair Corralation between International Equity and Midcap Growth

Assuming the 90 days horizon International Equity Index is expected to under-perform the Midcap Growth. But the mutual fund apears to be less risky and, when comparing its historical volatility, International Equity Index is 1.12 times less risky than Midcap Growth. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Midcap Growth Fund is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  1,051  in Midcap Growth Fund on September 12, 2024 and sell it today you would earn a total of  141.00  from holding Midcap Growth Fund or generate 13.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	84.38%
Values	Daily Returns

International Equity Index  vs.  Midcap Growth Fund

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Equity Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, International Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Midcap Growth

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days Midcap Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly weak basic indicators, Midcap Growth showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with International Equity and Midcap Growth

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

The idea behind International Equity Index and Midcap Growth 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.