Correlation Between Small Cap and Managed Volatility

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

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

Diversification Opportunities for Small Cap and Managed Volatility

0.28

Correlation Coefficient

Small Cap  Managed Volatility

Modest diversification

The 3 months correlation between Small and Managed is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Managed Volatility Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Managed Volatility 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 Value Fund are associated (or correlated) with Managed Volatility. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Managed Volatility has no effect on the direction of Small Cap i.e., Small Cap and Managed Volatility go up and down completely randomly.

Pair Corralation between Small Cap and Managed Volatility

Assuming the 90 days horizon Small Cap Value Fund is expected to under-perform the Managed Volatility. In addition to that, Small Cap is 85.78 times more volatile than Managed Volatility Fund. It trades about -0.08 of its total potential returns per unit of risk. Managed Volatility Fund is currently generating about 0.24 per unit of volatility. If you would invest  1,083  in Managed Volatility Fund on September 26, 2024 and sell it today you would earn a total of  2.00  from holding Managed Volatility Fund or generate 0.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	85.37%
Values	Daily Returns

Small Cap Value Fund  vs.  Managed Volatility Fund

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 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.

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.

Pair Trading with Small Cap and Managed Volatility

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

The idea behind Small Cap Value Fund and Managed Volatility 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.

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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.