Correlation Between Equity Income and Large Cap

Can any of the company-specific risk be diversified away by investing in both Equity Income 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 Income 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 Income Portfolio and Large Cap E, you can compare the effects of market volatilities on Equity Income 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 Income with a short position of Large Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Income and Large Cap.

Diversification Opportunities for Equity Income and Large Cap

0.96

Correlation Coefficient

Equity Income  Large Cap

Almost no diversification

The 3 months correlation between Equity and Large is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Portfolio and Large Cap E in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap E and Equity Income 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 Income Portfolio 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 E has no effect on the direction of Equity Income i.e., Equity Income and Large Cap go up and down completely randomly.

Pair Corralation between Equity Income and Large Cap

Assuming the 90 days horizon Equity Income Portfolio is expected to generate 0.89 times more return on investment than Large Cap. However, Equity Income Portfolio is 1.12 times less risky than Large Cap. It trades about 0.17 of its potential returns per unit of risk. Large Cap E is currently generating about 0.08 per unit of risk. If you would invest  1,431  in Equity Income Portfolio on May 3, 2025 and sell it today you would earn a total of  113.00  from holding Equity Income Portfolio or generate 7.9% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.39%
Values	Daily Returns

Equity Income Portfolio  vs.  Large Cap E

Equity Income Portfolio

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Large Cap E

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap E are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic 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 Income and Large Cap

The main advantage of trading using opposite Equity Income and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Income 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 Income Portfolio and Large Cap E 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.