Correlation Between Mid Capitalization and Large Cap

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

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

Diversification Opportunities for Mid Capitalization and Large Cap

0.89

Correlation Coefficient

Mid Capitalization  Large Cap

Very poor diversification

The 3 months correlation between Mid and Large is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Mid Capitalization Portfolio and Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Value and Mid 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 Mid Capitalization Portfolio are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Value has no effect on the direction of Mid Capitalization i.e., Mid Capitalization and Large Cap go up and down completely randomly.

Pair Corralation between Mid Capitalization and Large Cap

Assuming the 90 days horizon Mid Capitalization Portfolio is expected to under-perform the Large Cap. In addition to that, Mid Capitalization is 1.12 times more volatile than Large Cap Value. It trades about -0.07 of its total potential returns per unit of risk. Large Cap Value is currently generating about -0.01 per unit of volatility. If you would invest  2,616  in Large Cap Value on December 27, 2024 and sell it today you would lose (22.00) from holding Large Cap Value or give up 0.84% of portfolio value over 90 days.

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

Mid Capitalization Portfolio  vs.  Large Cap Value

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 fairly strong basic indicators, Mid Capitalization is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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 fairly strong basic indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Mid Capitalization and Large Cap

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

The idea behind Mid Capitalization Portfolio and Large Cap Value 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.