Correlation Between Large Capitalization and Mid Capitalization

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Can any of the company-specific risk be diversified away by investing in both Large Capitalization and Mid Capitalization 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 Large Capitalization and Mid Capitalization into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Large Capitalization Growth and Mid Capitalization Portfolio, you can compare the effects of market volatilities on Large Capitalization and Mid Capitalization 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 Large Capitalization with a short position of Mid Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Large Capitalization and Mid Capitalization.

Diversification Opportunities for Large Capitalization and Mid Capitalization

0.73
  Correlation Coefficient

Poor diversification

The 3 months correlation between Large and Mid is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Large Capitalization Growth and Mid Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Capitalization and Large Capitalization 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 Large Capitalization Growth are associated (or correlated) with Mid Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Capitalization has no effect on the direction of Large Capitalization i.e., Large Capitalization and Mid Capitalization go up and down completely randomly.

Pair Corralation between Large Capitalization and Mid Capitalization

Assuming the 90 days horizon Large Capitalization Growth is expected to generate 1.1 times more return on investment than Mid Capitalization. However, Large Capitalization is 1.1 times more volatile than Mid Capitalization Portfolio. It trades about 0.42 of its potential returns per unit of risk. Mid Capitalization Portfolio is currently generating about 0.31 per unit of risk. If you would invest  434.00  in Large Capitalization Growth on April 21, 2025 and sell it today you would earn a total of  140.00  from holding Large Capitalization Growth or generate 32.26% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Large Capitalization Growth  vs.  Mid Capitalization Portfolio

 Performance 
       Timeline  
Large Capitalization 

Risk-Adjusted Performance

Very Strong

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Large Capitalization Growth are ranked lower than 33 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Large Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.
Mid Capitalization 

Risk-Adjusted Performance

Solid

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Mid Capitalization Portfolio are ranked lower than 24 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Mid Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Large Capitalization and Mid Capitalization Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Large Capitalization and Mid Capitalization

The main advantage of trading using opposite Large Capitalization and Mid Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Large Capitalization position performs unexpectedly, Mid Capitalization 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 Mid Capitalization will offset losses from the drop in Mid Capitalization's long position.
The idea behind Large Capitalization Growth and Mid Capitalization Portfolio 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.

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