Correlation Between Blue Chip and Mid Cap

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

By analyzing existing cross correlation between Blue Chip Growth and Mid Cap Index, you can compare the effects of market volatilities on Blue Chip and Mid 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 Blue Chip with a short position of Mid Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Blue Chip and Mid Cap.

Diversification Opportunities for Blue Chip and Mid Cap

0.99

Correlation Coefficient

Blue Chip  Mid Cap

No risk reduction

The 3 months correlation between Blue and Mid is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Blue Chip Growth and Mid Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Index and Blue Chip 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 Blue Chip Growth are associated (or correlated) with Mid Cap. 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 Index has no effect on the direction of Blue Chip i.e., Blue Chip and Mid Cap go up and down completely randomly.

Pair Corralation between Blue Chip and Mid Cap

Assuming the 90 days horizon Blue Chip Growth is expected to under-perform the Mid Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Blue Chip Growth is 1.05 times less risky than Mid Cap. The mutual fund trades about -0.15 of its potential returns per unit of risk. The Mid Cap Index is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  2,766  in Mid Cap Index on December 27, 2024 and sell it today you would lose (441.00) from holding Mid Cap Index or give up 15.94% of portfolio value over 90 days.

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

Blue Chip Growth  vs.  Mid Cap Index

Blue Chip Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Blue Chip 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 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.

Mid Cap Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mid Cap Index 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 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 Blue Chip and Mid Cap

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

The idea behind Blue Chip Growth and Mid Cap Index 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.