Correlation Between Large Cap and Active International

Can any of the company-specific risk be diversified away by investing in both Large Cap and Active International 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 Active International 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 Active International Allocation, you can compare the effects of market volatilities on Large Cap and Active International 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 Active International. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Active International.

Diversification Opportunities for Large Cap and Active International

-0.53

Correlation Coefficient

Large Cap  Active International

Excellent diversification

The 3 months correlation between Large and Active is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Equity and Active International Allocatio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Active International 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 Active International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Active International has no effect on the direction of Large Cap i.e., Large Cap and Active International go up and down completely randomly.

Pair Corralation between Large Cap and Active International

Assuming the 90 days horizon Large Cap Equity is expected to generate 0.88 times more return on investment than Active International. However, Large Cap Equity is 1.14 times less risky than Active International. It trades about 0.11 of its potential returns per unit of risk. Active International Allocation is currently generating about 0.03 per unit of risk. If you would invest  1,763  in Large Cap Equity on September 19, 2024 and sell it today you would earn a total of  914.00  from holding Large Cap Equity or generate 51.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

Large Cap Equity  vs.  Active International Allocatio

Large Cap Equity

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 4 (%) 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.

Active International

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Active International Allocation has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Active International 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 Active International

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

The idea behind Large Cap Equity and Active International Allocation 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.