Correlation Between Broad Cap and Mid Cap

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

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

Diversification Opportunities for Broad Cap and Mid Cap

0.99

Correlation Coefficient

Broad Cap  Mid Cap

No risk reduction

The 3 months correlation between Broad and Mid is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Broad Cap Value and Mid Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Cap Index and Broad Cap 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 Broad Cap Value are associated (or correlated) with Mid Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Cap Index has no effect on the direction of Broad Cap i.e., Broad Cap and Mid Cap go up and down completely randomly.

Pair Corralation between Broad Cap and Mid Cap

Assuming the 90 days horizon Broad Cap is expected to generate 1.08 times less return on investment than Mid Cap. But when comparing it to its historical volatility, Broad Cap Value is 1.36 times less risky than Mid Cap. It trades about 0.08 of its potential returns per unit of risk. Mid Cap Index is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2,176  in Mid Cap Index on September 2, 2024 and sell it today you would earn a total of  827.00  from holding Mid Cap Index or generate 38.01% return on investment over 90 days.

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

Broad Cap Value  vs.  Mid Cap Index

Broad Cap Value

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broad Cap Value are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Broad Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Mid Cap Index

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Index are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Mid Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Broad Cap and Mid Cap

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

The idea behind Broad Cap Value and Mid Cap Index 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.