Correlation Between Madison Small and Madison Dividend

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

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

Diversification Opportunities for Madison Small and Madison Dividend

0.89

Correlation Coefficient

Madison Small  Madison Dividend

Very poor diversification

The 3 months correlation between Madison and Madison is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Madison Small Cap and Madison Dividend Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison Dividend Income and Madison Small 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 Madison Small Cap are associated (or correlated) with Madison Dividend. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison Dividend Income has no effect on the direction of Madison Small i.e., Madison Small and Madison Dividend go up and down completely randomly.

Pair Corralation between Madison Small and Madison Dividend

Assuming the 90 days horizon Madison Small is expected to generate 3.51 times less return on investment than Madison Dividend. In addition to that, Madison Small is 1.65 times more volatile than Madison Dividend Income. It trades about 0.03 of its total potential returns per unit of risk. Madison Dividend Income is currently generating about 0.19 per unit of volatility. If you would invest  2,495  in Madison Dividend Income on March 6, 2025 and sell it today you would earn a total of  88.00  from holding Madison Dividend Income or generate 3.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Madison Small Cap  vs.  Madison Dividend Income

Madison Small Cap

Risk-Adjusted Performance

Very Weak

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

Madison Dividend Income

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Madison Small and Madison Dividend

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

The idea behind Madison Small Cap and Madison Dividend Income 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.