Correlation Between Mid Cap and Government Securities

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

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

Diversification Opportunities for Mid Cap and Government Securities

-0.57

Correlation Coefficient

Mid Cap  Government Securities

Excellent diversification

The 3 months correlation between Mid and Government is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Strategic and Government Securities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Securities and Mid Cap 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 Mid Cap Strategic are associated (or correlated) with Government Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Securities has no effect on the direction of Mid Cap i.e., Mid Cap and Government Securities go up and down completely randomly.

Pair Corralation between Mid Cap and Government Securities

Assuming the 90 days horizon Mid Cap Strategic is expected to under-perform the Government Securities. In addition to that, Mid Cap is 4.73 times more volatile than Government Securities Fund. It trades about -0.08 of its total potential returns per unit of risk. Government Securities Fund is currently generating about 0.14 per unit of volatility. If you would invest  903.00  in Government Securities Fund on December 29, 2024 and sell it today you would earn a total of  23.00  from holding Government Securities Fund or generate 2.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

Mid Cap Strategic  vs.  Government Securities Fund

Mid Cap Strategic

Risk-Adjusted Performance

Very Weak

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

Government Securities

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Government Securities Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Government Securities is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Mid Cap and Government Securities

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

The idea behind Mid Cap Strategic and Government Securities Fund 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.