Correlation Between Mid Capitalization and Health Biotchnology

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

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

Diversification Opportunities for Mid Capitalization and Health Biotchnology

-0.52

Correlation Coefficient

Mid Capitalization  Health Biotchnology

Excellent diversification

The 3 months correlation between Mid and Health is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Mid Capitalization Portfolio and Health Biotchnology Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Biotchnology and Mid 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 Mid Capitalization Portfolio are associated (or correlated) with Health Biotchnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Biotchnology has no effect on the direction of Mid Capitalization i.e., Mid Capitalization and Health Biotchnology go up and down completely randomly.

Pair Corralation between Mid Capitalization and Health Biotchnology

Assuming the 90 days horizon Mid Capitalization Portfolio is expected to generate 1.56 times more return on investment than Health Biotchnology. However, Mid Capitalization is 1.56 times more volatile than Health Biotchnology Portfolio. It trades about 0.13 of its potential returns per unit of risk. Health Biotchnology Portfolio is currently generating about 0.04 per unit of risk. If you would invest  865.00  in Mid Capitalization Portfolio on September 3, 2024 and sell it today you would earn a total of  172.00  from holding Mid Capitalization Portfolio or generate 19.88% return on investment over 90 days.

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

Mid Capitalization Portfolio  vs.  Health Biotchnology Portfolio

Mid Capitalization

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Capitalization Portfolio are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Mid Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Health Biotchnology

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Mid Capitalization and Health Biotchnology

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

The idea behind Mid Capitalization Portfolio and Health Biotchnology 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.

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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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.