Correlation Between Income Growth and Small Cap
Can any of the company-specific risk be diversified away by investing in both Income Growth and Small 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 Income Growth and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Income Growth Fund and Small Cap Growth, you can compare the effects of market volatilities on Income Growth and Small 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 Income Growth with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Income Growth and Small Cap.
Diversification Opportunities for Income Growth and Small Cap
0.86 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Income and Small is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Income Growth Fund and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Income Growth 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 Income Growth Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Income Growth i.e., Income Growth and Small Cap go up and down completely randomly.
Pair Corralation between Income Growth and Small Cap
Assuming the 90 days horizon Income Growth Fund is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Income Growth Fund is 1.45 times less risky than Small Cap. The mutual fund trades about -0.44 of its potential returns per unit of risk. The Small Cap Growth is currently generating about -0.26 of returns per unit of risk over similar time horizon. If you would invest 2,028 in Small Cap Growth on September 26, 2024 and sell it today you would lose (118.00) from holding Small Cap Growth or give up 5.82% of portfolio value over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Strong |
Accuracy | 95.45% |
Values | Daily Returns |
Income Growth Fund vs. Small Cap Growth
Performance |
Timeline |
Income Growth |
Small Cap Growth |
Income Growth and Small Cap Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Income Growth and Small Cap
The main advantage of trading using opposite Income Growth and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Income Growth position performs unexpectedly, Small 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 Small Cap will offset losses from the drop in Small Cap's long position.Income Growth vs. Ultra Fund I | Income Growth vs. Equity Growth Fund | Income Growth vs. International Growth Fund | Income Growth vs. Growth Fund I |
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Check out your portfolio center.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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.
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