Correlation Between Capital Southwest and Prospect Capital

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

By analyzing existing cross correlation between Capital Southwest and Prospect Capital, you can compare the effects of market volatilities on Capital Southwest and Prospect Capital 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 Capital Southwest with a short position of Prospect Capital. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital Southwest and Prospect Capital.

Diversification Opportunities for Capital Southwest and Prospect Capital

0.85

Correlation Coefficient

Capital Southwest  Prospect Capital

Very poor diversification

The 3 months correlation between Capital and Prospect is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Capital Southwest and Prospect Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prospect Capital and Capital Southwest 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 Capital Southwest are associated (or correlated) with Prospect Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prospect Capital has no effect on the direction of Capital Southwest i.e., Capital Southwest and Prospect Capital go up and down completely randomly.

Pair Corralation between Capital Southwest and Prospect Capital

Given the investment horizon of 90 days Capital Southwest is expected to generate 0.58 times more return on investment than Prospect Capital. However, Capital Southwest is 1.73 times less risky than Prospect Capital. It trades about -0.15 of its potential returns per unit of risk. Prospect Capital is currently generating about -0.1 per unit of risk. If you would invest  2,438  in Capital Southwest on September 26, 2024 and sell it today you would lose (300.00) from holding Capital Southwest or give up 12.31% of portfolio value over 90 days.

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

Capital Southwest  vs.  Prospect Capital

Capital Southwest

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital Southwest has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Prospect Capital

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prospect Capital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Capital Southwest and Prospect Capital

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

The idea behind Capital Southwest and Prospect Capital 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.