Correlation Between Madison Diversified and Madison Small

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

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

Diversification Opportunities for Madison Diversified and Madison Small

0.75

Correlation Coefficient

Madison Diversified  Madison Small

Poor diversification

The 3 months correlation between Madison and Madison is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Madison Diversified Income and Madison Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison Small Cap and Madison Diversified 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 Diversified Income are associated (or correlated) with Madison Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison Small Cap has no effect on the direction of Madison Diversified i.e., Madison Diversified and Madison Small go up and down completely randomly.

Pair Corralation between Madison Diversified and Madison Small

Assuming the 90 days horizon Madison Diversified is expected to generate 6.46 times less return on investment than Madison Small. But when comparing it to its historical volatility, Madison Diversified Income is 4.17 times less risky than Madison Small. It trades about 0.15 of its potential returns per unit of risk. Madison Small Cap is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1,137  in Madison Small Cap on September 5, 2024 and sell it today you would earn a total of  179.00  from holding Madison Small Cap or generate 15.74% return on investment over 90 days.

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

Madison Diversified Income  vs.  Madison Small Cap

Madison Diversified

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Diversified Income are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Madison Diversified is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Madison Small Cap

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Small Cap are ranked lower than 18 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Madison Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Madison Diversified and Madison Small

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

The idea behind Madison Diversified Income and Madison 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.

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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.