Correlation Between Mid Capitalization and Large Capitalization
Can any of the company-specific risk be diversified away by investing in both Mid Capitalization and Large Capitalization 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 Capitalization and Large Capitalization into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Mid Capitalization Portfolio and Large Capitalization Growth, you can compare the effects of market volatilities on Mid Capitalization and Large Capitalization 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 Capitalization with a short position of Large Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Capitalization and Large Capitalization.
Diversification Opportunities for Mid Capitalization and Large Capitalization
0.99 | Correlation Coefficient |
No risk reduction
The 3 months correlation between Mid and Large is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Mid Capitalization Portfolio and Large Capitalization Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capitalization and Mid Capitalization 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 Capitalization Portfolio are associated (or correlated) with Large Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capitalization has no effect on the direction of Mid Capitalization i.e., Mid Capitalization and Large Capitalization go up and down completely randomly.
Pair Corralation between Mid Capitalization and Large Capitalization
Assuming the 90 days horizon Mid Capitalization is expected to generate 1.4 times less return on investment than Large Capitalization. But when comparing it to its historical volatility, Mid Capitalization Portfolio is 1.17 times less risky than Large Capitalization. It trades about 0.08 of its potential returns per unit of risk. Large Capitalization Growth is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest 2,218 in Large Capitalization Growth on August 29, 2024 and sell it today you would earn a total of 1,392 from holding Large Capitalization Growth or generate 62.76% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Mid Capitalization Portfolio vs. Large Capitalization Growth
Performance |
| Timeline |
| Mid Capitalization |
| Large Capitalization |
Mid Capitalization and Large Capitalization Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Mid Capitalization and Large Capitalization
The main advantage of trading using opposite Mid Capitalization and Large Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mid Capitalization position performs unexpectedly, Large Capitalization 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 Capitalization will offset losses from the drop in Large Capitalization's long position.The idea behind Mid Capitalization Portfolio and Large Capitalization Growth 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.
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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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