Correlation Between Inverse Government and Large Cap

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

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

Diversification Opportunities for Inverse Government and Large Cap

-0.76

Correlation Coefficient

Inverse Government  Large Cap

Pay attention - limited upside

The 3 months correlation between Inverse and Large is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Inverse Government Long and Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Value and Inverse Government 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 Inverse Government Long are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Value has no effect on the direction of Inverse Government i.e., Inverse Government and Large Cap go up and down completely randomly.

Pair Corralation between Inverse Government and Large Cap

Assuming the 90 days horizon Inverse Government is expected to generate 3.16 times less return on investment than Large Cap. But when comparing it to its historical volatility, Inverse Government Long is 1.01 times less risky than Large Cap. It trades about 0.09 of its potential returns per unit of risk. Large Cap Value is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  1,663  in Large Cap Value on October 26, 2024 and sell it today you would earn a total of  57.00  from holding Large Cap Value or generate 3.43% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

Inverse Government Long  vs.  Large Cap Value

Inverse Government Long

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Government Long are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Inverse Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Large Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Inverse Government and Large Cap

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

The idea behind Inverse Government Long and Large 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.