Correlation Between Hennessy Focus and Prudential Qma

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

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

Diversification Opportunities for Hennessy Focus and Prudential Qma

0.01

Correlation Coefficient

Hennessy Focus  Prudential Qma

Significant diversification

The 3 months correlation between Hennessy and Prudential is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Hennessy Focus Fund and Prudential Qma Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Qma Small and Hennessy Focus 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 Hennessy Focus Fund are associated (or correlated) with Prudential Qma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Qma Small has no effect on the direction of Hennessy Focus i.e., Hennessy Focus and Prudential Qma go up and down completely randomly.

Pair Corralation between Hennessy Focus and Prudential Qma

Assuming the 90 days horizon Hennessy Focus Fund is expected to under-perform the Prudential Qma. In addition to that, Hennessy Focus is 1.07 times more volatile than Prudential Qma Small Cap. It trades about -0.1 of its total potential returns per unit of risk. Prudential Qma Small Cap is currently generating about -0.04 per unit of volatility. If you would invest  1,885  in Prudential Qma Small Cap on September 15, 2024 and sell it today you would lose (103.00) from holding Prudential Qma Small Cap or give up 5.46% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Hennessy Focus Fund  vs.  Prudential Qma Small Cap

Hennessy Focus

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Hennessy Focus Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Prudential Qma Small

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prudential Qma Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Prudential Qma is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Hennessy Focus and Prudential Qma

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

The idea behind Hennessy Focus Fund and Prudential Qma Small Cap 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.