Correlation Between Large Cap and Moderate Balanced

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

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

Diversification Opportunities for Large Cap and Moderate Balanced

0.95

Correlation Coefficient

Large Cap  Moderate Balanced

Almost no diversification

The 3 months correlation between Large and Moderate is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Moderate Balanced Allocation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Balanced and Large 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 Large Cap Value are associated (or correlated) with Moderate Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Balanced has no effect on the direction of Large Cap i.e., Large Cap and Moderate Balanced go up and down completely randomly.

Pair Corralation between Large Cap and Moderate Balanced

Assuming the 90 days horizon Large Cap is expected to generate 1.1 times less return on investment than Moderate Balanced. In addition to that, Large Cap is 1.45 times more volatile than Moderate Balanced Allocation. It trades about 0.11 of its total potential returns per unit of risk. Moderate Balanced Allocation is currently generating about 0.18 per unit of volatility. If you would invest  1,192  in Moderate Balanced Allocation on May 14, 2025 and sell it today you would earn a total of  58.00  from holding Moderate Balanced Allocation or generate 4.87% return on investment over 90 days.

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

Large Cap Value  vs.  Moderate Balanced Allocation

Large Cap Value

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Large Cap Value are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Large Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Moderate Balanced

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Moderate Balanced Allocation are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Moderate Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Large Cap and Moderate Balanced

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

The idea behind Large Cap Value and Moderate Balanced Allocation 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.