Correlation Between Equity Growth and Large Cap

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

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

Diversification Opportunities for Equity Growth and Large Cap

0.92

Correlation Coefficient

Equity Growth  Large Cap

Almost no diversification

The 3 months correlation between Equity and Large is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Equity Growth Fund and Large Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Equity and Equity Growth 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 Equity Growth Fund are associated (or correlated) with Large Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Cap Equity has no effect on the direction of Equity Growth i.e., Equity Growth and Large Cap go up and down completely randomly.

Pair Corralation between Equity Growth and Large Cap

Assuming the 90 days horizon Equity Growth Fund is expected to generate 0.95 times more return on investment than Large Cap. However, Equity Growth Fund is 1.05 times less risky than Large Cap. It trades about 0.12 of its potential returns per unit of risk. Large Cap Equity is currently generating about 0.06 per unit of risk. If you would invest  2,513  in Equity Growth Fund on September 12, 2024 and sell it today you would earn a total of  956.00  from holding Equity Growth Fund or generate 38.04% return on investment over 90 days.

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

Equity Growth Fund  vs.  Large Cap Equity

Equity Growth

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Growth Fund are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Equity Growth may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Large Cap Equity

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Equity are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Equity Growth and Large Cap

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

The idea behind Equity Growth Fund and Large Cap Equity 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.