Correlation Between Tax-managed and Mid Cap

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

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

Diversification Opportunities for Tax-managed and Mid Cap

0.53

Correlation Coefficient

Tax-managed  Mid Cap

Very weak diversification

The 3 months correlation between Tax-managed and Mid is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Tax Managed Mid Small and Mid Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Value and Tax-managed 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 Tax Managed Mid Small are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Value has no effect on the direction of Tax-managed i.e., Tax-managed and Mid Cap go up and down completely randomly.

Pair Corralation between Tax-managed and Mid Cap

Assuming the 90 days horizon Tax Managed Mid Small is expected to under-perform the Mid Cap. In addition to that, Tax-managed is 1.36 times more volatile than Mid Cap Value. It trades about -0.14 of its total potential returns per unit of risk. Mid Cap Value is currently generating about 0.07 per unit of volatility. If you would invest  1,538  in Mid Cap Value on December 18, 2024 and sell it today you would earn a total of  49.00  from holding Mid Cap Value or generate 3.19% return on investment over 90 days.

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

Tax Managed Mid Small  vs.  Mid Cap Value

Tax Managed Mid

Risk-Adjusted Performance

Very Weak

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

Mid Cap Value

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Tax-managed and Mid Cap

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

The idea behind Tax Managed Mid Small and Mid Cap Value 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.