Correlation Between Large Cap and Investment Quality

Can any of the company-specific risk be diversified away by investing in both Large Cap and Investment Quality 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 Investment Quality 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 Investment Quality Bond, you can compare the effects of market volatilities on Large Cap and Investment Quality 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 Investment Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Investment Quality.

Diversification Opportunities for Large Cap and Investment Quality

0.53

Correlation Coefficient

Large Cap  Investment Quality

Very weak diversification

The 3 months correlation between Large and Investment is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Investment Quality Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Investment Quality Bond 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 Investment Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Investment Quality Bond has no effect on the direction of Large Cap i.e., Large Cap and Investment Quality go up and down completely randomly.

Pair Corralation between Large Cap and Investment Quality

Assuming the 90 days horizon Large Cap Value is expected to under-perform the Investment Quality. In addition to that, Large Cap is 8.14 times more volatile than Investment Quality Bond. It trades about -0.13 of its total potential returns per unit of risk. Investment Quality Bond is currently generating about 0.03 per unit of volatility. If you would invest  923.00  in Investment Quality Bond on November 29, 2024 and sell it today you would earn a total of  4.00  from holding Investment Quality Bond or generate 0.43% return on investment over 90 days.

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

Large Cap Value  vs.  Investment Quality Bond

Large Cap Value

Risk-Adjusted Performance

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 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.

Investment Quality Bond

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Investment Quality Bond are ranked lower than 2 (%) 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.

Pair Trading with Large Cap and Investment Quality

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

The idea behind Large Cap Value and Investment Quality Bond 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.