Correlation Between Short Term and Largecap Value

Can any of the company-specific risk be diversified away by investing in both Short Term and Largecap Value 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 Short Term and Largecap Value into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Short Term Income Fund and Largecap Value Fund, you can compare the effects of market volatilities on Short Term and Largecap Value 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 Short Term with a short position of Largecap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Term and Largecap Value.

Diversification Opportunities for Short Term and Largecap Value

-0.54

Correlation Coefficient

Short Term  Largecap Value

Excellent diversification

The 3 months correlation between Short and Largecap is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Income Fund and Largecap Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Largecap Value and Short Term 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 Short Term Income Fund are associated (or correlated) with Largecap Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Largecap Value has no effect on the direction of Short Term i.e., Short Term and Largecap Value go up and down completely randomly.

Pair Corralation between Short Term and Largecap Value

Assuming the 90 days horizon Short Term Income Fund is expected to under-perform the Largecap Value. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Term Income Fund is 6.72 times less risky than Largecap Value. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Largecap Value Fund is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1,973  in Largecap Value Fund on September 12, 2024 and sell it today you would earn a total of  121.00  from holding Largecap Value Fund or generate 6.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

Short Term Income Fund  vs.  Largecap Value Fund

Short Term Income

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Term Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Short Term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Largecap Value

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Largecap Value Fund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward-looking indicators, Largecap Value is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Short Term and Largecap Value

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

The idea behind Short Term Income Fund and Largecap Value Fund 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.