Correlation Between International Equity and Large Capitalization

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

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

Diversification Opportunities for International Equity and Large Capitalization

-0.29

Correlation Coefficient

International Equity  Large Capitalization

Very good diversification

The 3 months correlation between International and Large is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Portfolio and Large Capitalization Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capitalization and International Equity 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 International Equity Portfolio are associated (or correlated) with Large Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capitalization has no effect on the direction of International Equity i.e., International Equity and Large Capitalization go up and down completely randomly.

Pair Corralation between International Equity and Large Capitalization

Assuming the 90 days horizon International Equity Portfolio is expected to under-perform the Large Capitalization. But the mutual fund apears to be less risky and, when comparing its historical volatility, International Equity Portfolio is 1.18 times less risky than Large Capitalization. The mutual fund trades about -0.01 of its potential returns per unit of risk. The Large Capitalization Growth is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  3,053  in Large Capitalization Growth on September 2, 2024 and sell it today you would earn a total of  546.00  from holding Large Capitalization Growth or generate 17.88% return on investment over 90 days.

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

International Equity Portfolio  vs.  Large Capitalization Growth

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days International Equity Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, International Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Large Capitalization

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Large Capitalization Growth are ranked lower than 21 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Large Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with International Equity and Large Capitalization

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

The idea behind International Equity Portfolio and Large Capitalization Growth 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.