Correlation Between Mid Cap and Diversified Bond

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

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

Diversification Opportunities for Mid Cap and Diversified Bond

-0.42

Correlation Coefficient

Mid Cap  Diversified Bond

Very good diversification

The 3 months correlation between Mid and Diversified is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value and Diversified Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Bond and Mid 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 Mid Cap Value are associated (or correlated) with Diversified Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Bond has no effect on the direction of Mid Cap i.e., Mid Cap and Diversified Bond go up and down completely randomly.

Pair Corralation between Mid Cap and Diversified Bond

Assuming the 90 days horizon Mid Cap Value is expected to generate 2.19 times more return on investment than Diversified Bond. However, Mid Cap is 2.19 times more volatile than Diversified Bond Fund. It trades about 0.1 of its potential returns per unit of risk. Diversified Bond Fund is currently generating about -0.1 per unit of risk. If you would invest  1,665  in Mid Cap Value on August 22, 2024 and sell it today you would earn a total of  65.00  from holding Mid Cap Value or generate 3.9% return on investment over 90 days.

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

Mid Cap Value  vs.  Diversified Bond Fund

Mid Cap Value

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Cap Value are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Mid Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Diversified Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diversified Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Diversified Bond 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 Cap and Diversified Bond

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

The idea behind Mid Cap Value and Diversified Bond Fund 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.