Correlation Between Large Cap and Health Biotchnology

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

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

Diversification Opportunities for Large Cap and Health Biotchnology

-0.33

Correlation Coefficient

Large Cap  Health Biotchnology

Very good diversification

The 3 months correlation between Large and HEALTH is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Health Biotchnology Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Biotchnology and Large 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 Large Cap Value are associated (or correlated) with Health Biotchnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Biotchnology has no effect on the direction of Large Cap i.e., Large Cap and Health Biotchnology go up and down completely randomly.

Pair Corralation between Large Cap and Health Biotchnology

Assuming the 90 days horizon Large Cap Value is expected to generate 0.99 times more return on investment than Health Biotchnology. However, Large Cap Value is 1.01 times less risky than Health Biotchnology. It trades about 0.15 of its potential returns per unit of risk. Health Biotchnology Portfolio is currently generating about -0.1 per unit of risk. If you would invest  2,919  in Large Cap Value on September 3, 2024 and sell it today you would earn a total of  215.00  from holding Large Cap Value or generate 7.37% return on investment over 90 days.

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

Large Cap Value  vs.  Health Biotchnology Portfolio

Large Cap Value

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Value are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Health Biotchnology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Biotchnology Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Health Biotchnology 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 Cap and Health Biotchnology

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

The idea behind Large Cap Value and Health Biotchnology 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.

Check out your portfolio center.

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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.