Correlation Between Mid Cap and Government Long

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

By analyzing existing cross correlation between Mid Cap 15x Strategy and Government Long Bond, you can compare the effects of market volatilities on Mid Cap and Government Long 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 Mid Cap with a short position of Government Long. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and Government Long.

Diversification Opportunities for Mid Cap and Government Long

-0.72

Correlation Coefficient

Mid Cap  Government Long

Pay attention - limited upside

The 3 months correlation between Mid and Government is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap 15x Strategy and Government Long Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Long Bond and Mid Cap 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 Mid Cap 15x Strategy are associated (or correlated) with Government Long. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Long Bond has no effect on the direction of Mid Cap i.e., Mid Cap and Government Long go up and down completely randomly.

Pair Corralation between Mid Cap and Government Long

Assuming the 90 days horizon Mid Cap 15x Strategy is expected to generate 1.38 times more return on investment than Government Long. However, Mid Cap is 1.38 times more volatile than Government Long Bond. It trades about 0.19 of its potential returns per unit of risk. Government Long Bond is currently generating about -0.11 per unit of risk. If you would invest  12,611  in Mid Cap 15x Strategy on September 4, 2024 and sell it today you would earn a total of  2,194  from holding Mid Cap 15x Strategy or generate 17.4% return on investment over 90 days.

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

Mid Cap 15x Strategy  vs.  Government Long Bond

Mid Cap 15x

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap 15x Strategy are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical indicators, Mid Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Government Long Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Government Long Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental 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 Mid Cap and Government Long

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

The idea behind Mid Cap 15x Strategy and Government Long Bond 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.