Correlation Between Small Cap and Capital World

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

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

Diversification Opportunities for Small Cap and Capital World

-0.71

Correlation Coefficient

Small Cap  Capital World

Pay attention - limited upside

The 3 months correlation between Small and Capital is -0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Capital World Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital World Bond 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 Equity are associated (or correlated) with Capital World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital World Bond has no effect on the direction of Small Cap i.e., Small Cap and Capital World go up and down completely randomly.

Pair Corralation between Small Cap and Capital World

Assuming the 90 days horizon Small Cap Equity is expected to generate 3.56 times more return on investment than Capital World. However, Small Cap is 3.56 times more volatile than Capital World Bond. It trades about 0.17 of its potential returns per unit of risk. Capital World Bond is currently generating about -0.12 per unit of risk. If you would invest  1,797  in Small Cap Equity on September 4, 2024 and sell it today you would earn a total of  242.00  from holding Small Cap Equity or generate 13.47% return on investment over 90 days.

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

Small Cap Equity  vs.  Capital World Bond

Small Cap Equity

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap showed solid returns over the last few months and may actually be approaching a breakup point.

Capital World Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital World Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Capital World 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 Capital World

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

The idea behind Small Cap Equity and Capital World Bond 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.