Correlation Between Principal Value and Principal Mega

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

By analyzing existing cross correlation between Principal Value ETF and Principal Mega Cap ETF, you can compare the effects of market volatilities on Principal Value and Principal Mega 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 Principal Value with a short position of Principal Mega. Check out your portfolio center. Please also check ongoing floating volatility patterns of Principal Value and Principal Mega.

Diversification Opportunities for Principal Value and Principal Mega

0.8

Correlation Coefficient

Principal Value  Principal Mega

Very poor diversification

The 3 months correlation between Principal and Principal is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Principal Value ETF and Principal Mega Cap ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Mega Cap and Principal Value 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 Principal Value ETF are associated (or correlated) with Principal Mega. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Mega Cap has no effect on the direction of Principal Value i.e., Principal Value and Principal Mega go up and down completely randomly.

Pair Corralation between Principal Value and Principal Mega

Allowing for the 90-day total investment horizon Principal Value ETF is expected to generate 0.79 times more return on investment than Principal Mega. However, Principal Value ETF is 1.27 times less risky than Principal Mega. It trades about -0.03 of its potential returns per unit of risk. Principal Mega Cap ETF is currently generating about -0.09 per unit of risk. If you would invest  4,949  in Principal Value ETF on December 30, 2024 and sell it today you would lose (99.00) from holding Principal Value ETF or give up 2.0% of portfolio value over 90 days.

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

Principal Value ETF  vs.  Principal Mega Cap ETF

Principal Value ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Value ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Principal Value is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Principal Mega Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Principal Mega Cap ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, Principal Mega is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Principal Value and Principal Mega

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

The idea behind Principal Value ETF and Principal Mega Cap ETF 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.