Correlation Between Large Cap and International Equity

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

Diversification Opportunities for Large Cap and International Equity

-0.22

Correlation Coefficient

Large Cap  International Equity

Very good diversification

The 3 months correlation between Large and International is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Equity and International Equity Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity 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 International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equity has no effect on the direction of Large Cap i.e., Large Cap and International Equity go up and down completely randomly.

Pair Corralation between Large Cap and International Equity

Assuming the 90 days horizon Large Cap Equity is expected to generate 0.01 times more return on investment than International Equity. However, Large Cap Equity is 105.55 times less risky than International Equity. It trades about 0.22 of its potential returns per unit of risk. International Equity Portfolio is currently generating about -0.24 per unit of risk. If you would invest  2,670  in Large Cap Equity on October 6, 2024 and sell it today you would earn a total of  7.00  from holding Large Cap Equity or generate 0.26% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Large Cap Equity  vs.  International Equity Portfolio

Large Cap Equity

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 5 (%) 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.

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Equity Portfolio 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 essential indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Large Cap and International Equity

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

The idea behind Large Cap Equity and International Equity Portfolio 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.

Check out your portfolio center.

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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.