Correlation Between Short-term Government and Midcap Fund

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

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

Diversification Opportunities for Short-term Government and Midcap Fund

-0.13

Correlation Coefficient

Short-term Government  Midcap Fund

Good diversification

The 3 months correlation between Short-term and Midcap is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Midcap Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Midcap Fund Class and Short-term Government 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 Government Fund are associated (or correlated) with Midcap Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Midcap Fund Class has no effect on the direction of Short-term Government i.e., Short-term Government and Midcap Fund go up and down completely randomly.

Pair Corralation between Short-term Government and Midcap Fund

Assuming the 90 days horizon Short-term Government is expected to generate 9.13 times less return on investment than Midcap Fund. But when comparing it to its historical volatility, Short Term Government Fund is 5.83 times less risky than Midcap Fund. It trades about 0.06 of its potential returns per unit of risk. Midcap Fund Class is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  2,993  in Midcap Fund Class on December 4, 2024 and sell it today you would earn a total of  1,388  from holding Midcap Fund Class or generate 46.37% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Short Term Government Fund  vs.  Midcap Fund Class

Short Term Government

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Short Term Government Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Short-term Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Midcap Fund Class

Risk-Adjusted Performance

Very Weak

Over the last 90 days Midcap Fund Class has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Short-term Government and Midcap Fund

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

The idea behind Short Term Government Fund and Midcap Fund Class 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.