Correlation Between Small Cap and Redwood Real

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

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

Diversification Opportunities for Small Cap and Redwood Real

0.54

Correlation Coefficient

Small Cap  Redwood Real

Very weak diversification

The 3 months correlation between Small and Redwood is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Redwood Real Estate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood Real Estate and Small 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 Small Cap Growth are associated (or correlated) with Redwood Real. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Redwood Real Estate has no effect on the direction of Small Cap i.e., Small Cap and Redwood Real go up and down completely randomly.

Pair Corralation between Small Cap and Redwood Real

Assuming the 90 days horizon Small Cap Growth is expected to generate 13.29 times more return on investment than Redwood Real. However, Small Cap is 13.29 times more volatile than Redwood Real Estate. It trades about 0.03 of its potential returns per unit of risk. Redwood Real Estate is currently generating about 0.19 per unit of risk. If you would invest  2,279  in Small Cap Growth on October 1, 2024 and sell it today you would earn a total of  47.00  from holding Small Cap Growth or generate 2.06% return on investment over 90 days.

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

Small Cap Growth  vs.  Redwood Real Estate

Small Cap Growth

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Redwood Real Estate

Risk-Adjusted Performance

14 of 100

Good

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

Pair Trading with Small Cap and Redwood Real

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

The idea behind Small Cap Growth and Redwood Real Estate 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.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.