Correlation Between Investment Quality and Large Cap
Can any of the company-specific risk be diversified away by investing in both Investment Quality 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 Investment Quality and Large Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Investment Quality Bond and Large Cap Value, you can compare the effects of market volatilities on Investment Quality 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 Investment Quality with a short position of Large Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment Quality and Large Cap.
Diversification Opportunities for Investment Quality and Large Cap
-0.68 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Investment and Large is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Investment Quality Bond and Large Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Value and Investment Quality 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 Investment Quality Bond 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 Value has no effect on the direction of Investment Quality i.e., Investment Quality and Large Cap go up and down completely randomly.
Pair Corralation between Investment Quality and Large Cap
Assuming the 90 days horizon Investment Quality Bond is expected to under-perform the Large Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Investment Quality Bond is 3.93 times less risky than Large Cap. The mutual fund trades about -0.16 of its potential returns per unit of risk. The Large Cap Value is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest 2,843 in Large Cap Value on August 25, 2024 and sell it today you would earn a total of 0.00 from holding Large Cap Value or generate 0.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Investment Quality Bond vs. Large Cap Value
Performance |
| Timeline |
| Investment Quality Bond |
| Large Cap Value |
Investment Quality and Large Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Investment Quality and Large Cap
The main advantage of trading using opposite Investment Quality and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investment Quality 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.The idea behind Investment Quality Bond and Large Cap Value 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.
| Large Cap vs. Aqr Large Cap | Large Cap vs. Tax Managed Large Cap | Large Cap vs. Alternative Asset Allocation | Large Cap vs. Qs Large Cap |
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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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