Correlation Between The Fixed and Small Cap

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

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

Diversification Opportunities for The Fixed and Small Cap

-0.02

Correlation Coefficient

The Fixed  Small Cap

Good diversification

The 3 months correlation between THE and Small is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding The Fixed Income and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and The Fixed 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 The Fixed Income 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 Equity has no effect on the direction of The Fixed i.e., The Fixed and Small Cap go up and down completely randomly.

Pair Corralation between The Fixed and Small Cap

Assuming the 90 days horizon The Fixed is expected to generate 15.75 times less return on investment than Small Cap. But when comparing it to its historical volatility, The Fixed Income is 4.88 times less risky than Small Cap. It trades about 0.05 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.17 of returns per unit of risk over similar time horizon. 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	Insignificant
Accuracy	100.0%
Values	Daily Returns

The Fixed Income  vs.  Small Cap Equity

Fixed Income

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Fixed Income are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, The Fixed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

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.

Pair Trading with The Fixed and Small Cap

The main advantage of trading using opposite The Fixed and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if The Fixed 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 The Fixed Income and Small Cap Equity 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.