Correlation Between Madison Mid and Madison Small

Can any of the company-specific risk be diversified away by investing in both Madison Mid 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 Mid 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 Mid Cap and Madison Small Cap, you can compare the effects of market volatilities on Madison Mid 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 Mid with a short position of Madison Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Madison Mid and Madison Small.

Diversification Opportunities for Madison Mid and Madison Small

0.93

Correlation Coefficient

Madison Mid  Madison Small

Almost no diversification

The 3 months correlation between Madison and Madison is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Madison Mid Cap 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 Mid 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 Mid Cap 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 Mid i.e., Madison Mid and Madison Small go up and down completely randomly.

Pair Corralation between Madison Mid and Madison Small

Assuming the 90 days horizon Madison Mid is expected to generate 1.73 times less return on investment than Madison Small. But when comparing it to its historical volatility, Madison Mid Cap is 1.17 times less risky than Madison Small. It trades about 0.14 of its potential returns per unit of risk. Madison Small Cap is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  1,135  in Madison Small Cap on September 12, 2024 and sell it today you would earn a total of  164.00  from holding Madison Small Cap or generate 14.45% return on investment over 90 days.

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

Madison Mid Cap  vs.  Madison Small Cap

Madison Mid Cap

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Mid Cap are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Madison Mid may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Madison Small Cap

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Madison Small Cap are ranked lower than 16 (%) 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 Mid and Madison Small

The main advantage of trading using opposite Madison Mid and Madison Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Madison Mid 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 Mid Cap 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.