Correlation Between Rational Defensive and Small-company Stock

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

Diversification Opportunities for Rational Defensive and Small-company Stock

0.92

Correlation Coefficient

Rational Defensive  Small-company Stock

Almost no diversification

The 3 months correlation between Rational and Small-company is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Rational Defensive Growth and Small Company Stock Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small-company Stock 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 Small-company Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small-company Stock has no effect on the direction of Rational Defensive i.e., Rational Defensive and Small-company Stock go up and down completely randomly.

Pair Corralation between Rational Defensive and Small-company Stock

Assuming the 90 days horizon Rational Defensive is expected to generate 1.02 times less return on investment than Small-company Stock. But when comparing it to its historical volatility, Rational Defensive Growth is 1.33 times less risky than Small-company Stock. It trades about 0.27 of its potential returns per unit of risk. Small Company Stock Fund is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  2,550  in Small Company Stock Fund on September 5, 2024 and sell it today you would earn a total of  416.00  from holding Small Company Stock Fund or generate 16.31% return on investment over 90 days.

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

Rational Defensive Growth  vs.  Small Company Stock 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.

Small-company Stock

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Small Company Stock 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, Small-company Stock showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Rational Defensive and Small-company Stock

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

The idea behind Rational Defensive Growth and Small Company Stock 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.

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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.