Correlation Between Mid Cap and New Economy

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

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

Diversification Opportunities for Mid Cap and New Economy

0.81

Correlation Coefficient

Mid Cap  New Economy

Very poor diversification

The 3 months correlation between Mid and New is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Growth and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund and Mid 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 Mid Cap Growth are associated (or correlated) with New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Mid Cap i.e., Mid Cap and New Economy go up and down completely randomly.

Pair Corralation between Mid Cap and New Economy

Assuming the 90 days horizon Mid Cap Growth is expected to generate 1.16 times more return on investment than New Economy. However, Mid Cap is 1.16 times more volatile than New Economy Fund. It trades about 0.31 of its potential returns per unit of risk. New Economy Fund is currently generating about 0.17 per unit of risk. If you would invest  3,417  in Mid Cap Growth on September 4, 2024 and sell it today you would earn a total of  716.00  from holding Mid Cap Growth or generate 20.95% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Mid Cap Growth  vs.  New Economy Fund

Mid Cap Growth

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Growth are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Mid Cap showed solid returns over the last few months and may actually be approaching a breakup point.

New Economy Fund

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in New Economy Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, New Economy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Mid Cap and New Economy

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

The idea behind Mid Cap Growth and New Economy 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.