Correlation Between Smallcap World and Federated Hermes

Can any of the company-specific risk be diversified away by investing in both Smallcap World and Federated Hermes 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 Smallcap World and Federated Hermes into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Smallcap World Fund and Federated Hermes Sdg, you can compare the effects of market volatilities on Smallcap World and Federated Hermes 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 Smallcap World with a short position of Federated Hermes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Federated Hermes.

Diversification Opportunities for Smallcap World and Federated Hermes

0.74

Correlation Coefficient

Smallcap World  Federated Hermes

Poor diversification

The 3 months correlation between Smallcap and Federated is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Federated Hermes Sdg in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federated Hermes Sdg and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Federated Hermes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federated Hermes Sdg has no effect on the direction of Smallcap World i.e., Smallcap World and Federated Hermes go up and down completely randomly.

Pair Corralation between Smallcap World and Federated Hermes

Assuming the 90 days horizon Smallcap World Fund is expected to generate 1.02 times more return on investment than Federated Hermes. However, Smallcap World is 1.02 times more volatile than Federated Hermes Sdg. It trades about 0.12 of its potential returns per unit of risk. Federated Hermes Sdg is currently generating about 0.07 per unit of risk. If you would invest  6,839  in Smallcap World Fund on September 4, 2024 and sell it today you would earn a total of  420.00  from holding Smallcap World Fund or generate 6.14% return on investment over 90 days.

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

Smallcap World Fund  vs.  Federated Hermes Sdg

Smallcap World

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Smallcap World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Federated Hermes Sdg

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Federated Hermes Sdg are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Federated Hermes is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Smallcap World and Federated Hermes

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

The idea behind Smallcap World Fund and Federated Hermes Sdg 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.