Correlation Between Rational Defensive and Ultra-small Company

Can any of the company-specific risk be diversified away by investing in both Rational Defensive and Ultra-small Company 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 Rational Defensive and Ultra-small Company into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Rational Defensive Growth and Ultra Small Pany Fund, you can compare the effects of market volatilities on Rational Defensive and Ultra-small Company 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 Rational Defensive with a short position of Ultra-small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Rational Defensive and Ultra-small Company.

Diversification Opportunities for Rational Defensive and Ultra-small Company

0.85

Correlation Coefficient

Rational Defensive  Ultra-small Company

Very poor diversification

The 3 months correlation between Rational and Ultra-small is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Rational Defensive Growth and Ultra Small Pany Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra-small Company and Rational Defensive 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 Rational Defensive Growth are associated (or correlated) with Ultra-small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra-small Company has no effect on the direction of Rational Defensive i.e., Rational Defensive and Ultra-small Company go up and down completely randomly.

Pair Corralation between Rational Defensive and Ultra-small Company

Assuming the 90 days horizon Rational Defensive is expected to generate 1.15 times less return on investment than Ultra-small Company. But when comparing it to its historical volatility, Rational Defensive Growth is 1.43 times less risky than Ultra-small Company. It trades about 0.26 of its potential returns per unit of risk. Ultra Small Pany Fund is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  2,889  in Ultra Small Pany Fund on September 4, 2024 and sell it today you would earn a total of  514.00  from holding Ultra Small Pany Fund or generate 17.79% return on investment over 90 days.

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

Rational Defensive Growth  vs.  Ultra Small Pany Fund

Rational Defensive Growth

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Rational Defensive Growth are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Rational Defensive showed solid returns over the last few months and may actually be approaching a breakup point.

Ultra-small Company

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Small Pany Fund are ranked lower than 16 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Ultra-small Company showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rational Defensive and Ultra-small Company

The main advantage of trading using opposite Rational Defensive and Ultra-small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rational Defensive position performs unexpectedly, Ultra-small Company 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 Ultra-small Company will offset losses from the drop in Ultra-small Company's long position.

The idea behind Rational Defensive Growth and Ultra Small Pany Fund 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.