Correlation Between Large Cap and Large Capitalization

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

Diversification Opportunities for Large Cap and Large Capitalization

-0.55

Correlation Coefficient

Large Cap  Large Capitalization

Excellent diversification

The 3 months correlation between Large and Large is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Large Cap Value and Large Capitalization Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Large Capitalization 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 Large Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Large Capitalization has no effect on the direction of Large Cap i.e., Large Cap and Large Capitalization go up and down completely randomly.

Pair Corralation between Large Cap and Large Capitalization

Assuming the 90 days horizon Large Cap Value is expected to under-perform the Large Capitalization. But the mutual fund apears to be less risky and, when comparing its historical volatility, Large Cap Value is 1.34 times less risky than Large Capitalization. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Large Capitalization Growth is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,567  in Large Capitalization Growth on August 14, 2025 and sell it today you would earn a total of  187.00  from holding Large Capitalization Growth or generate 7.28% return on investment over 90 days.

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

Large Cap Value  vs.  Large Capitalization Growth

Large Cap Value

Risk-Adjusted Performance

Weakest

Over the last 90 days Large Cap Value 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.

Large Capitalization

Risk-Adjusted Performance

Fair

Compared to the overall equity markets, risk-adjusted returns on investments in Large Capitalization Growth are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Large Capitalization may actually be approaching a critical reversion point that can send shares even higher in December 2025.

Pair Trading with Large Cap and Large Capitalization

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

The idea behind Large Cap Value and Large Capitalization Growth 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.