Correlation Between Small Cap and Unconstrained Emerging

Can any of the company-specific risk be diversified away by investing in both Small Cap and Unconstrained Emerging 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 Unconstrained Emerging 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 Unconstrained Emerging Markets, you can compare the effects of market volatilities on Small Cap and Unconstrained Emerging 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 Unconstrained Emerging. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Unconstrained Emerging.

Diversification Opportunities for Small Cap and Unconstrained Emerging

-0.59

Correlation Coefficient

Small Cap  Unconstrained Emerging

Excellent diversification

The 3 months correlation between Small and Unconstrained is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Unconstrained Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Unconstrained Emerging 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 Unconstrained Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Unconstrained Emerging has no effect on the direction of Small Cap i.e., Small Cap and Unconstrained Emerging go up and down completely randomly.

Pair Corralation between Small Cap and Unconstrained Emerging

Assuming the 90 days horizon Small Cap Equity is expected to generate 4.01 times more return on investment than Unconstrained Emerging. However, Small Cap is 4.01 times more volatile than Unconstrained Emerging Markets. It trades about 0.09 of its potential returns per unit of risk. Unconstrained Emerging Markets is currently generating about -0.04 per unit of risk. If you would invest  1,779  in Small Cap Equity on September 12, 2024 and sell it today you would earn a total of  128.00  from holding Small Cap Equity or generate 7.2% return on investment over 90 days.

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

Small Cap Equity  vs.  Unconstrained Emerging Markets

Small Cap Equity

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Unconstrained Emerging

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Unconstrained Emerging Markets has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Unconstrained Emerging 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 Unconstrained Emerging

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

The idea behind Small Cap Equity and Unconstrained Emerging Markets 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.