Correlation Between Common Stock and Large Cap
Can any of the company-specific risk be diversified away by investing in both Common Stock and Large 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 Common Stock and Large Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Common Stock Fund and Large Cap Fund, you can compare the effects of market volatilities on Common Stock and Large 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 Common Stock with a short position of Large Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Common Stock and Large Cap.
Diversification Opportunities for Common Stock and Large Cap
0.83 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Common and Large is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Common Stock Fund and Large Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Fund and Common Stock 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 Common Stock Fund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Fund has no effect on the direction of Common Stock i.e., Common Stock and Large Cap go up and down completely randomly.
Pair Corralation between Common Stock and Large Cap
Assuming the 90 days horizon Common Stock is expected to generate 1.09 times less return on investment than Large Cap. But when comparing it to its historical volatility, Common Stock Fund is 1.12 times less risky than Large Cap. It trades about 0.08 of its potential returns per unit of risk. Large Cap Fund is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 1,342 in Large Cap Fund on August 28, 2024 and sell it today you would earn a total of 428.00 from holding Large Cap Fund or generate 31.89% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.72% |
| Values | Daily Returns |
Common Stock Fund vs. Large Cap Fund
Performance |
| Timeline |
| Common Stock |
| Large Cap Fund |
Common Stock and Large Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Common Stock and Large Cap
The main advantage of trading using opposite Common Stock and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Common Stock position performs unexpectedly, Large 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 Large Cap will offset losses from the drop in Large Cap's long position.| Common Stock vs. Large Cap Fund | Common Stock vs. Madison Mid Cap | Common Stock vs. Royce Premier Fund | Common Stock vs. The Jensen Portfolio |
| Large Cap vs. Wasatch Large Cap | Large Cap vs. Loomis Sayles Bond | Large Cap vs. Harbor International Fund | Large Cap vs. Equity Series Class |
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.
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