Correlation Between Managed Volatility and Small Cap

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

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

Diversification Opportunities for Managed Volatility and Small Cap

0.32

Correlation Coefficient

Managed Volatility  Small Cap

Weak diversification

The 3 months correlation between Managed and Small is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Managed Volatility Fund and Small Cap Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Managed Volatility 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 Managed Volatility 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 Value has no effect on the direction of Managed Volatility i.e., Managed Volatility and Small Cap go up and down completely randomly.

Pair Corralation between Managed Volatility and Small Cap

Assuming the 90 days horizon Managed Volatility Fund is expected to generate 0.02 times more return on investment than Small Cap. However, Managed Volatility Fund is 56.8 times less risky than Small Cap. It trades about 0.34 of its potential returns per unit of risk. Small Cap Value Fund is currently generating about -0.06 per unit of risk. If you would invest  1,079  in Managed Volatility Fund on September 25, 2024 and sell it today you would earn a total of  6.00  from holding Managed Volatility Fund or generate 0.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	92.06%
Values	Daily Returns

Managed Volatility Fund  vs.  Small Cap Value Fund

Managed Volatility

Risk-Adjusted Performance

0 of 100

Strong

Over the last 90 days Managed Volatility Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Managed Volatility is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Managed Volatility and Small Cap

The main advantage of trading using opposite Managed Volatility and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Managed Volatility 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.

The idea behind Managed Volatility Fund and Small Cap Value Fund 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.