Correlation Between Mid Cap and California Intermediate-ter

Can any of the company-specific risk be diversified away by investing in both Mid Cap and California Intermediate-ter 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 California Intermediate-ter 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 California Intermediate Term Tax Free, you can compare the effects of market volatilities on Mid Cap and California Intermediate-ter 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 California Intermediate-ter. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mid Cap and California Intermediate-ter.

Diversification Opportunities for Mid Cap and California Intermediate-ter

0.79

Correlation Coefficient

Mid Cap  California Intermediate-ter

Poor diversification

The 3 months correlation between Mid and California is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Mid Cap Value and California Intermediate Term T in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Intermediate-ter 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 California Intermediate-ter. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Intermediate-ter has no effect on the direction of Mid Cap i.e., Mid Cap and California Intermediate-ter go up and down completely randomly.

Pair Corralation between Mid Cap and California Intermediate-ter

Assuming the 90 days horizon Mid Cap Value is expected to generate 3.34 times more return on investment than California Intermediate-ter. However, Mid Cap is 3.34 times more volatile than California Intermediate Term Tax Free. It trades about 0.01 of its potential returns per unit of risk. California Intermediate Term Tax Free is currently generating about -0.11 per unit of risk. If you would invest  1,523  in Mid Cap Value on February 2, 2025 and sell it today you would earn a total of  2.00  from holding Mid Cap Value or generate 0.13% return on investment over 90 days.

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

Mid Cap Value  vs.  California Intermediate Term T

Mid Cap Value

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mid Cap Value has generated negative risk-adjusted returns adding no value to fund investors. 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.

California Intermediate-ter

Risk-Adjusted Performance

Very Weak

Over the last 90 days California Intermediate Term Tax Free has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, California Intermediate-ter 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 California Intermediate-ter

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

The idea behind Mid Cap Value and California Intermediate Term Tax Free 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.