Correlation Between Western Asset and Midcap Fund

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

By analyzing existing cross correlation between Western Asset Municipal and Midcap Fund Class, you can compare the effects of market volatilities on Western Asset and Midcap Fund 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 Western Asset with a short position of Midcap Fund. Check out your portfolio center. Please also check ongoing floating volatility patterns of Western Asset and Midcap Fund.

Diversification Opportunities for Western Asset and Midcap Fund

-0.49

Correlation Coefficient

Western Asset  Midcap Fund

Very good diversification

The 3 months correlation between Western and Midcap is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Municipal and Midcap Fund Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Midcap Fund Class and Western Asset 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 Western Asset Municipal are associated (or correlated) with Midcap Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Midcap Fund Class has no effect on the direction of Western Asset i.e., Western Asset and Midcap Fund go up and down completely randomly.

Pair Corralation between Western Asset and Midcap Fund

Assuming the 90 days horizon Western Asset Municipal is expected to under-perform the Midcap Fund. But the mutual fund apears to be less risky and, when comparing its historical volatility, Western Asset Municipal is 2.93 times less risky than Midcap Fund. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Midcap Fund Class is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  4,222  in Midcap Fund Class on September 12, 2024 and sell it today you would earn a total of  411.00  from holding Midcap Fund Class or generate 9.73% return on investment over 90 days.

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

Western Asset Municipal  vs.  Midcap Fund Class

Western Asset Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

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

Midcap Fund Class

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Midcap Fund Class are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Midcap Fund may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Western Asset and Midcap Fund

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

The idea behind Western Asset Municipal and Midcap Fund Class 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.