Correlation Between M Large and Large Cap

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

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

Diversification Opportunities for M Large and Large Cap

0.91

Correlation Coefficient

M Large  Large Cap

Almost no diversification

The 3 months correlation between MTCGX and Large is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding M Large Cap and Large Cap Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Cap Fund and M Large 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 M Large Cap 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 Fund has no effect on the direction of M Large i.e., M Large and Large Cap go up and down completely randomly.

Pair Corralation between M Large and Large Cap

Assuming the 90 days horizon M Large Cap is expected to under-perform the Large Cap. In addition to that, M Large is 1.63 times more volatile than Large Cap Fund. It trades about -0.02 of its total potential returns per unit of risk. Large Cap Fund is currently generating about -0.02 per unit of volatility. If you would invest  1,492  in Large Cap Fund on February 3, 2025 and sell it today you would lose (36.00) from holding Large Cap Fund or give up 2.41% of portfolio value over 90 days.

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

M Large Cap  vs.  Large Cap Fund

M Large Cap

Risk-Adjusted Performance

Very Weak

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

Large Cap Fund

Risk-Adjusted Performance

Very Weak

Over the last 90 days Large Cap Fund has generated negative risk-adjusted returns adding no value to fund investors. 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 M Large and Large Cap

The main advantage of trading using opposite M Large and Large Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if M Large 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 M Large Cap and Large Cap 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.

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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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.