Correlation Between Gmo High and Small Cap

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

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

Diversification Opportunities for Gmo High and Small Cap

0.7

Correlation Coefficient

Gmo High  Small Cap

Poor diversification

The 3 months correlation between Gmo and Small is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Gmo High Yield and Small Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Gmo High 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 Gmo High Yield 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 Gmo High i.e., Gmo High and Small Cap go up and down completely randomly.

Pair Corralation between Gmo High and Small Cap

Assuming the 90 days horizon Gmo High is expected to generate 2.99 times less return on investment than Small Cap. But when comparing it to its historical volatility, Gmo High Yield is 8.03 times less risky than Small Cap. It trades about 0.05 of its potential returns per unit of risk. Small Cap Value Profund is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  10,966  in Small Cap Value Profund on September 20, 2024 and sell it today you would earn a total of  129.00  from holding Small Cap Value Profund or generate 1.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Gmo High Yield  vs.  Small Cap Value Profund

Gmo High Yield

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Gmo High Yield are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Gmo High 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

1 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Gmo High and Small Cap

The main advantage of trading using opposite Gmo High and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Gmo High 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 Gmo High Yield and Small Cap Value Profund 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.