Correlation Between Madison Small and Madison Investors

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

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

Diversification Opportunities for Madison Small and Madison Investors

0.94

Correlation Coefficient

Madison Small  Madison Investors

Almost no diversification

The 3 months correlation between Madison and Madison is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Madison Small Cap and Madison Investors Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison Investors and Madison Small 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 Madison Small Cap are associated (or correlated) with Madison Investors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison Investors has no effect on the direction of Madison Small i.e., Madison Small and Madison Investors go up and down completely randomly.

Pair Corralation between Madison Small and Madison Investors

Assuming the 90 days horizon Madison Small Cap is expected to generate 1.35 times more return on investment than Madison Investors. However, Madison Small is 1.35 times more volatile than Madison Investors Fund. It trades about 0.22 of its potential returns per unit of risk. Madison Investors Fund is currently generating about 0.17 per unit of risk. If you would invest  1,114  in Madison Small Cap on September 4, 2024 and sell it today you would earn a total of  169.00  from holding Madison Small Cap or generate 15.17% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Madison Small Cap  vs.  Madison Investors Fund

Madison Small Cap

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Small Cap are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Madison Small showed solid returns over the last few months and may actually be approaching a breakup point.

Madison Investors

Risk-Adjusted Performance

13 of 100

Good

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

Pair Trading with Madison Small and Madison Investors

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

The idea behind Madison Small Cap and Madison Investors 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.