Correlation Between Large Capital and Mid Cap

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

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

Diversification Opportunities for Large Capital and Mid Cap

0.8

Correlation Coefficient

Large Capital  Mid Cap

Very poor diversification

The 3 months correlation between Large and Mid is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Large Capital 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 Large Capital 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 Large Capital 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 Large Capital i.e., Large Capital and Mid Cap go up and down completely randomly.

Pair Corralation between Large Capital and Mid Cap

Assuming the 90 days horizon Large Capital Growth is expected to under-perform the Mid Cap. In addition to that, Large Capital is 1.49 times more volatile than Mid Cap Index. It trades about -0.14 of its total potential returns per unit of risk. Mid Cap Index is currently generating about -0.14 per unit of volatility. If you would invest  2,766  in Mid Cap Index on December 27, 2024 and sell it today you would lose (457.00) from holding Mid Cap Index or give up 16.52% of portfolio value over 90 days.

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

Large Capital Growth  vs.  Mid Cap Index

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.

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 Large Capital and Mid Cap

The main advantage of trading using opposite Large Capital and Mid Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Capital 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 Large Capital 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.