Correlation Between High Yield and Midcap Growth

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

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

Diversification Opportunities for High Yield and Midcap Growth

-0.36

Correlation Coefficient

High Yield  Midcap Growth

Very good diversification

The 3 months correlation between High and Midcap is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding High Yield Fund and Midcap Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Midcap Growth and High Yield 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 High Yield Fund 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 High Yield i.e., High Yield and Midcap Growth go up and down completely randomly.

Pair Corralation between High Yield and Midcap Growth

Assuming the 90 days horizon High Yield Fund is expected to generate 0.13 times more return on investment than Midcap Growth. However, High Yield Fund is 7.86 times less risky than Midcap Growth. It trades about 0.16 of its potential returns per unit of risk. Midcap Growth Fund is currently generating about -0.11 per unit of risk. If you would invest  804.00  in High Yield Fund on December 20, 2024 and sell it today you would earn a total of  10.00  from holding High Yield Fund or generate 1.24% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	78.33%
Values	Daily Returns

High Yield Fund  vs.  Midcap Growth Fund

High Yield Fund

Risk-Adjusted Performance

Good

Over the last 90 days High Yield Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, High Yield 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

Very Weak

Over the last 90 days Midcap Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward-looking indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with High Yield and Midcap Growth

The main advantage of trading using opposite High Yield and Midcap Growth positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if High Yield 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 High Yield Fund 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.