Correlation Between Intermediate-term and Large Capitalization

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

By analyzing existing cross correlation between Intermediate Term Tax Free Bond and Large Capitalization Growth, you can compare the effects of market volatilities on Intermediate-term and Large Capitalization 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 Intermediate-term with a short position of Large Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Intermediate-term and Large Capitalization.

Diversification Opportunities for Intermediate-term and Large Capitalization

0.63

Correlation Coefficient

Intermediate-term  Large Capitalization

Poor diversification

The 3 months correlation between Intermediate-term and Large is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Tax Free Bon and Large Capitalization Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capitalization and Intermediate-term 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 Intermediate Term Tax Free Bond are associated (or correlated) with Large Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capitalization has no effect on the direction of Intermediate-term i.e., Intermediate-term and Large Capitalization go up and down completely randomly.

Pair Corralation between Intermediate-term and Large Capitalization

Assuming the 90 days horizon Intermediate Term Tax Free Bond is expected to generate 0.06 times more return on investment than Large Capitalization. However, Intermediate Term Tax Free Bond is 16.23 times less risky than Large Capitalization. It trades about 0.0 of its potential returns per unit of risk. Large Capitalization Growth is currently generating about -0.12 per unit of risk. If you would invest  1,080  in Intermediate Term Tax Free Bond on December 1, 2024 and sell it today you would earn a total of  0.00  from holding Intermediate Term Tax Free Bond or generate 0.0% return on investment over 90 days.

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

Intermediate Term Tax Free Bon  vs.  Large Capitalization Growth

Intermediate Term Tax

Risk-Adjusted Performance

Very Weak

Over the last 90 days Intermediate Term Tax Free Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Intermediate-term is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Capitalization

Risk-Adjusted Performance

Very Weak

Over the last 90 days Large Capitalization Growth 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 basic indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Intermediate-term and Large Capitalization

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

The idea behind Intermediate Term Tax Free Bond and Large Capitalization Growth 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.