Correlation Between Sp Midcap and Extended Market

Can any of the company-specific risk be diversified away by investing in both Sp Midcap and Extended Market 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 Sp Midcap and Extended Market into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Sp Midcap Index and Extended Market Index, you can compare the effects of market volatilities on Sp Midcap and Extended Market 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 Sp Midcap with a short position of Extended Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sp Midcap and Extended Market.

Diversification Opportunities for Sp Midcap and Extended Market

0.83

Correlation Coefficient

Sp Midcap  Extended Market

Very poor diversification

The 3 months correlation between SPMIX and Extended is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Sp Midcap Index and Extended Market Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extended Market Index and Sp Midcap 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 Sp Midcap Index are associated (or correlated) with Extended Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extended Market Index has no effect on the direction of Sp Midcap i.e., Sp Midcap and Extended Market go up and down completely randomly.

Pair Corralation between Sp Midcap and Extended Market

Assuming the 90 days horizon Sp Midcap Index is expected to generate 0.96 times more return on investment than Extended Market. However, Sp Midcap Index is 1.05 times less risky than Extended Market. It trades about -0.01 of its potential returns per unit of risk. Extended Market Index is currently generating about -0.04 per unit of risk. If you would invest  2,541  in Sp Midcap Index on December 2, 2024 and sell it today you would lose (13.00) from holding Sp Midcap Index or give up 0.51% of portfolio value over 90 days.

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

Sp Midcap Index  vs.  Extended Market Index

Sp Midcap Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sp Midcap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Extended Market Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Extended Market Index 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 forward indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Sp Midcap and Extended Market

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

The idea behind Sp Midcap Index and Extended Market Index 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 Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.