Correlation Between Asset Allocation and Broad Cap

Can any of the company-specific risk be diversified away by investing in both Asset Allocation and Broad Cap 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 Asset Allocation and Broad Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Asset Allocation and Broad Cap

0.92

Correlation Coefficient

Asset Allocation  Broad Cap

Almost no diversification

The 3 months correlation between ASSET and Broad is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Asset Allocation Fund and Broad Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broad Cap Value and Asset Allocation 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 Asset Allocation Fund are associated (or correlated) with Broad Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Broad Cap Value has no effect on the direction of Asset Allocation i.e., Asset Allocation and Broad Cap go up and down completely randomly.

Pair Corralation between Asset Allocation and Broad Cap

Assuming the 90 days horizon Asset Allocation Fund is expected to under-perform the Broad Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Asset Allocation Fund is 1.11 times less risky than Broad Cap. The mutual fund trades about -0.12 of its potential returns per unit of risk. The Broad Cap Value is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,478  in Broad Cap Value on December 28, 2024 and sell it today you would lose (47.00) from holding Broad Cap Value or give up 3.18% of portfolio value over 90 days.

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

Asset Allocation Fund  vs.  Broad Cap Value

Asset Allocation

Risk-Adjusted Performance

Very Weak

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

Broad Cap Value

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Asset Allocation and Broad Cap

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

The idea behind Asset Allocation Fund and Broad Cap Value 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..