Correlation Between California Bond and Mid-cap Value

Can any of the company-specific risk be diversified away by investing in both California Bond and Mid-cap Value 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 California Bond and Mid-cap Value into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between California Bond Fund and Mid Cap Value Profund, you can compare the effects of market volatilities on California Bond and Mid-cap Value 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 California Bond with a short position of Mid-cap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of California Bond and Mid-cap Value.

Diversification Opportunities for California Bond and Mid-cap Value

0.68

Correlation Coefficient

California Bond  Mid-cap Value

Poor diversification

The 3 months correlation between California and Mid-cap is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and Mid Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Value and California Bond 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 California Bond Fund are associated (or correlated) with Mid-cap Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Value has no effect on the direction of California Bond i.e., California Bond and Mid-cap Value go up and down completely randomly.

Pair Corralation between California Bond and Mid-cap Value

Assuming the 90 days horizon California Bond Fund is expected to under-perform the Mid-cap Value. But the mutual fund apears to be less risky and, when comparing its historical volatility, California Bond Fund is 2.62 times less risky than Mid-cap Value. The mutual fund trades about -0.04 of its potential returns per unit of risk. The Mid Cap Value Profund is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  8,876  in Mid Cap Value Profund on October 22, 2024 and sell it today you would earn a total of  291.00  from holding Mid Cap Value Profund or generate 3.28% return on investment over 90 days.

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

California Bond Fund  vs.  Mid Cap Value Profund

California Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Mid Cap Value

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value Profund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Mid-cap Value is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Bond and Mid-cap Value

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

The idea behind California Bond Fund and Mid Cap Value Profund 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.