Correlation Between Large Cap and Total Market
Can any of the company-specific risk be diversified away by investing in both Large Cap and Total Market 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 Cap and Total Market into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Large Cap E and Total Market Portfolio, you can compare the effects of market volatilities on Large Cap and Total Market 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 Cap with a short position of Total Market. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Total Market.
Diversification Opportunities for Large Cap and Total Market
0.93 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Large and Total is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap E and Total Market Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Total Market Portfolio and Large 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 Large Cap E are associated (or correlated) with Total Market. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Total Market Portfolio has no effect on the direction of Large Cap i.e., Large Cap and Total Market go up and down completely randomly.
Pair Corralation between Large Cap and Total Market
Assuming the 90 days horizon Large Cap is expected to generate 1.46 times less return on investment than Total Market. But when comparing it to its historical volatility, Large Cap E is 1.3 times less risky than Total Market. It trades about 0.15 of its potential returns per unit of risk. Total Market Portfolio is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest 2,034 in Total Market Portfolio on August 29, 2024 and sell it today you would earn a total of 148.00 from holding Total Market Portfolio or generate 7.28% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 97.67% |
| Values | Daily Returns |
Large Cap E vs. Total Market Portfolio
Performance |
| Timeline |
| Large Cap E |
| Total Market Portfolio |
Large Cap and Total Market Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Large Cap and Total Market
The main advantage of trading using opposite Large Cap and Total Market positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Cap position performs unexpectedly, Total Market 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 Total Market will offset losses from the drop in Total Market's long position.| Large Cap vs. Dws Government Money | Large Cap vs. John Hancock Government | Large Cap vs. Prudential Government Income | Large Cap vs. Fidelity Series Government |
| Total Market vs. Edgewood Growth Fund | Total Market vs. Johcm International Select | Total Market vs. Invesco Senior Loan | Total Market vs. Doubleline Shiller Enhanced |
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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.
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