Correlation Between AMS Small and IShares MSCI

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

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

Diversification Opportunities for AMS Small and IShares MSCI

0.78

Correlation Coefficient

AMS Small  IShares MSCI

Poor diversification

The 3 months correlation between AMS and IShares is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding AMS Small Cap and iShares MSCI EMU in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI EMU and AMS Small 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 AMS Small Cap are associated (or correlated) with IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI EMU has no effect on the direction of AMS Small i.e., AMS Small and IShares MSCI go up and down completely randomly.

Pair Corralation between AMS Small and IShares MSCI

Assuming the 90 days trading horizon AMS Small Cap is expected to generate 1.22 times more return on investment than IShares MSCI. However, AMS Small is 1.22 times more volatile than iShares MSCI EMU. It trades about 0.08 of its potential returns per unit of risk. iShares MSCI EMU is currently generating about 0.03 per unit of risk. If you would invest  118,382  in AMS Small Cap on September 16, 2024 and sell it today you would earn a total of  5,651  from holding AMS Small Cap or generate 4.77% return on investment over 90 days.

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

AMS Small Cap  vs.  iShares MSCI EMU

Pair Trading with AMS Small and IShares MSCI

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

The idea behind AMS Small Cap and iShares MSCI EMU 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.