Correlation Between Large Cap and Common Stock

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

By analyzing existing cross correlation between Large Cap Fund and Common Stock Fund, you can compare the effects of market volatilities on Large Cap and Common Stock 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 Common Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Cap and Common Stock.

Diversification Opportunities for Large Cap and Common Stock

0.86

Correlation Coefficient

Large Cap  Common Stock

Very poor diversification

The 3 months correlation between Large and Common is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Fund and Common Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Common Stock 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 Fund are associated (or correlated) with Common Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Common Stock has no effect on the direction of Large Cap i.e., Large Cap and Common Stock go up and down completely randomly.

Pair Corralation between Large Cap and Common Stock

Assuming the 90 days horizon Large Cap Fund is expected to under-perform the Common Stock. But the mutual fund apears to be less risky and, when comparing its historical volatility, Large Cap Fund is 1.22 times less risky than Common Stock. The mutual fund trades about -0.16 of its potential returns per unit of risk. The Common Stock Fund is currently generating about -0.11 of returns per unit of risk over similar time horizon. If you would invest  3,889  in Common Stock Fund on September 20, 2024 and sell it today you would lose (103.00) from holding Common Stock Fund or give up 2.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Large Cap Fund  vs.  Common Stock Fund

Large Cap Fund

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Common Stock

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Common Stock Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Common Stock is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Large Cap and Common Stock

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

The idea behind Large Cap Fund and Common Stock Fund 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.

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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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.