Correlation Between Large Capitalization and Moderately Conservative

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

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

Diversification Opportunities for Large Capitalization and Moderately Conservative

0.96

Correlation Coefficient

Large Capitalization  Moderately Conservative

Almost no diversification

The 3 months correlation between Large and Moderately is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Large Capitalization Growth and Moderately Servative Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderately Conservative and Large Capitalization 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 Large Capitalization Growth are associated (or correlated) with Moderately Conservative. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderately Conservative has no effect on the direction of Large Capitalization i.e., Large Capitalization and Moderately Conservative go up and down completely randomly.

Pair Corralation between Large Capitalization and Moderately Conservative

Assuming the 90 days horizon Large Capitalization Growth is expected to under-perform the Moderately Conservative. In addition to that, Large Capitalization is 2.49 times more volatile than Moderately Servative Balanced. It trades about -0.1 of its total potential returns per unit of risk. Moderately Servative Balanced is currently generating about -0.04 per unit of volatility. If you would invest  1,093  in Moderately Servative Balanced on December 30, 2024 and sell it today you would lose (16.00) from holding Moderately Servative Balanced or give up 1.46% of portfolio value over 90 days.

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

Large Capitalization Growth  vs.  Moderately Servative Balanced

Large Capitalization

Risk-Adjusted Performance

Very Weak

Over the last 90 days Large Capitalization Growth 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.

Moderately Conservative

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Large Capitalization and Moderately Conservative

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

The idea behind Large Capitalization Growth and Moderately Servative Balanced 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .