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

-0.71

Correlation Coefficient

Large Cap  Investment Quality

Pay attention - limited upside

The 3 months correlation between Large and Investment is -0.71. 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 generate 3.08 times more return on investment than Investment Quality. However, Large Cap is 3.08 times more volatile than Investment Quality Bond. It trades about 0.14 of its potential returns per unit of risk. Investment Quality Bond is currently generating about -0.06 per unit of risk. If you would invest  1,993  in Large Cap Value on August 31, 2024 and sell it today you would earn a total of  141.00  from holding Large Cap Value or generate 7.07% return on investment over 90 days.

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

Large Cap Value  vs.  Investment Quality Bond

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 fundamental indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Investment Quality Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Investment Quality Bond has generated negative risk-adjusted returns adding no value to fund investors. 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.