Correlation Between Longshort Portfolio and Large Cap

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

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

Diversification Opportunities for Longshort Portfolio and Large Cap

0.87

Correlation Coefficient

Longshort Portfolio  Large Cap

Very poor diversification

The 3 months correlation between Longshort and Large is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Longshort Portfolio Longshort and Large Cap E in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap E and Longshort Portfolio 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 Longshort Portfolio Longshort 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 E has no effect on the direction of Longshort Portfolio i.e., Longshort Portfolio and Large Cap go up and down completely randomly.

Pair Corralation between Longshort Portfolio and Large Cap

Assuming the 90 days horizon Longshort Portfolio is expected to generate 2.04 times less return on investment than Large Cap. But when comparing it to its historical volatility, Longshort Portfolio Longshort is 1.99 times less risky than Large Cap. It trades about 0.13 of its potential returns per unit of risk. Large Cap E is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,306  in Large Cap E on September 3, 2024 and sell it today you would earn a total of  344.00  from holding Large Cap E or generate 14.92% return on investment over 90 days.

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

Longshort Portfolio Longshort  vs.  Large Cap E

Longshort Portfolio

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Longshort Portfolio Longshort are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Longshort Portfolio is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Cap E

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap E are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Large Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Longshort Portfolio and Large Cap

The main advantage of trading using opposite Longshort Portfolio and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Longshort Portfolio 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 Longshort Portfolio Longshort and Large Cap E 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.