Correlation Between Ab Large and Ab Small

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

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

Diversification Opportunities for Ab Large and Ab Small

0.96

Correlation Coefficient

Ab Large  Ab Small

Almost no diversification

The 3 months correlation between APGYX and QUAIX is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Ab Large Cap and Ab Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ab Small Cap and Ab Large 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 Ab Large Cap are associated (or correlated) with Ab Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ab Small Cap has no effect on the direction of Ab Large i.e., Ab Large and Ab Small go up and down completely randomly.

Pair Corralation between Ab Large and Ab Small

Assuming the 90 days horizon Ab Large is expected to generate 1.61 times less return on investment than Ab Small. But when comparing it to its historical volatility, Ab Large Cap is 1.34 times less risky than Ab Small. It trades about 0.16 of its potential returns per unit of risk. Ab Small Cap is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  6,809  in Ab Small Cap on August 31, 2024 and sell it today you would earn a total of  1,058  from holding Ab Small Cap or generate 15.54% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Ab Large Cap  vs.  Ab Small Cap

Ab Large Cap

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ab Large Cap are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Ab Large may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Ab Small Cap

Risk-Adjusted Performance

15 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Ab Small Cap are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Ab Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ab Large and Ab Small

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

The idea behind Ab Large Cap and Ab Small Cap 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.