Correlation Between Moderate Balanced and Mid Capitalization

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

By analyzing existing cross correlation between Moderate Balanced Allocation and Mid Capitalization Portfolio, you can compare the effects of market volatilities on Moderate Balanced and Mid Capitalization 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 Moderate Balanced with a short position of Mid Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Moderate Balanced and Mid Capitalization.

Diversification Opportunities for Moderate Balanced and Mid Capitalization

0.87

Correlation Coefficient

Moderate Balanced  Mid Capitalization

Very poor diversification

The 3 months correlation between Moderate and Mid is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Moderate Balanced Allocation and Mid Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Capitalization and Moderate Balanced 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 Moderate Balanced Allocation are associated (or correlated) with Mid Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Capitalization has no effect on the direction of Moderate Balanced i.e., Moderate Balanced and Mid Capitalization go up and down completely randomly.

Pair Corralation between Moderate Balanced and Mid Capitalization

Assuming the 90 days horizon Moderate Balanced Allocation is expected to generate 0.58 times more return on investment than Mid Capitalization. However, Moderate Balanced Allocation is 1.74 times less risky than Mid Capitalization. It trades about -0.04 of its potential returns per unit of risk. Mid Capitalization Portfolio is currently generating about -0.08 per unit of risk. If you would invest  1,192  in Moderate Balanced Allocation on December 29, 2024 and sell it today you would lose (18.00) from holding Moderate Balanced Allocation or give up 1.51% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Moderate Balanced Allocation  vs.  Mid Capitalization Portfolio

Moderate Balanced

Risk-Adjusted Performance

Very Weak

Over the last 90 days Moderate Balanced Allocation has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Moderate Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Mid Capitalization

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mid Capitalization Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Mid Capitalization is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Moderate Balanced and Mid Capitalization

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

The idea behind Moderate Balanced Allocation and Mid Capitalization Portfolio 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.