Correlation Between Large Capitalization and International Equity

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

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

Diversification Opportunities for Large Capitalization and International Equity

-0.32

Correlation Coefficient

Large Capitalization  International Equity

Very good diversification

The 3 months correlation between Large and International is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Large Capitalization Growth and International Equity Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Equity and Large Capitalization 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 Large Capitalization Growth are associated (or correlated) with International Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Equity has no effect on the direction of Large Capitalization i.e., Large Capitalization and International Equity go up and down completely randomly.

Pair Corralation between Large Capitalization and International Equity

Assuming the 90 days horizon Large Capitalization Growth is expected to generate 1.18 times more return on investment than International Equity. However, Large Capitalization is 1.18 times more volatile than International Equity Portfolio. It trades about 0.27 of its potential returns per unit of risk. International Equity Portfolio is currently generating about -0.02 per unit of risk. If you would invest  1,021  in Large Capitalization Growth on September 2, 2024 and sell it today you would earn a total of  179.00  from holding Large Capitalization Growth or generate 17.53% return on investment over 90 days.

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

Large Capitalization Growth  vs.  International Equity Portfolio

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 fundamental indicators, Large Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

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 fundamental indicators, International Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Large Capitalization and International Equity

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

The idea behind Large Capitalization Growth and International Equity Portfolio 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.