Correlation Between Asset Allocation and Large Capital

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

Diversification Opportunities for Asset Allocation and Large Capital

0.98

Correlation Coefficient

Asset Allocation  Large Capital

Almost no diversification

The 3 months correlation between ASSET and Large is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Asset Allocation Fund and Large Capital Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capital Growth 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 Large Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capital Growth has no effect on the direction of Asset Allocation i.e., Asset Allocation and Large Capital go up and down completely randomly.

Pair Corralation between Asset Allocation and Large Capital

Assuming the 90 days horizon Asset Allocation Fund is expected to generate 0.31 times more return on investment than Large Capital. However, Asset Allocation Fund is 3.25 times less risky than Large Capital. It trades about -0.12 of its potential returns per unit of risk. Large Capital Growth is currently generating about -0.14 per unit of risk. If you would invest  1,205  in Asset Allocation Fund on December 28, 2024 and sell it today you would lose (84.00) from holding Asset Allocation Fund or give up 6.97% 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.  Large Capital Growth

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.

Large Capital Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Large Capital 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 technical and fundamental 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 Asset Allocation and Large Capital

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

The idea behind Asset Allocation Fund and Large Capital 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.