Correlation Between Large Cap and Lifestyle

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

By analyzing existing cross correlation between Large Cap Equity and Lifestyle Ii Moderate, you can compare the effects of market volatilities on Large Cap and Lifestyle 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 Lifestyle. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Lifestyle.

Diversification Opportunities for Large Cap and Lifestyle

0.3

Correlation Coefficient

Large Cap  Lifestyle

Weak diversification

The 3 months correlation between Large and Lifestyle is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Equity and Lifestyle Ii Moderate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lifestyle Ii Moderate 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 Equity are associated (or correlated) with Lifestyle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lifestyle Ii Moderate has no effect on the direction of Large Cap i.e., Large Cap and Lifestyle go up and down completely randomly.

Pair Corralation between Large Cap and Lifestyle

Assuming the 90 days horizon Large Cap Equity is expected to generate 1.88 times more return on investment than Lifestyle. However, Large Cap is 1.88 times more volatile than Lifestyle Ii Moderate. It trades about 0.08 of its potential returns per unit of risk. Lifestyle Ii Moderate is currently generating about 0.06 per unit of risk. If you would invest  2,011  in Large Cap Equity on October 23, 2024 and sell it today you would earn a total of  666.00  from holding Large Cap Equity or generate 33.12% return on investment over 90 days.

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

Large Cap Equity  vs.  Lifestyle Ii Moderate

Large Cap Equity

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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.

Lifestyle Ii Moderate

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Lifestyle Ii Moderate are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Lifestyle 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 Lifestyle

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

The idea behind Large Cap Equity and Lifestyle Ii Moderate 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 Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.