Correlation Between Investment Quality and Mid Capitalization

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

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

Diversification Opportunities for Investment Quality and Mid Capitalization

0.43

Correlation Coefficient

Investment Quality  Mid Capitalization

Very weak diversification

The 3 months correlation between Investment and Mid is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Investment Quality Bond and Mid Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Capitalization and Investment Quality 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 Investment Quality Bond 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 Investment Quality i.e., Investment Quality and Mid Capitalization go up and down completely randomly.

Pair Corralation between Investment Quality and Mid Capitalization

Assuming the 90 days horizon Investment Quality Bond is expected to generate 0.11 times more return on investment than Mid Capitalization. However, Investment Quality Bond is 9.5 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 -0.17 per unit of risk. If you would invest  932.00  in Investment Quality Bond on November 29, 2024 and sell it today you would earn a total of  6.00  from holding Investment Quality Bond or generate 0.64% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.33%
Values	Daily Returns

Investment Quality Bond  vs.  Mid Capitalization Portfolio

Investment Quality Bond

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Quality Bond are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Investment Quality 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 weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Investment Quality and Mid Capitalization

The main advantage of trading using opposite Investment Quality and Mid Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investment Quality 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 Investment Quality Bond 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.