Correlation Between Small Cap and Regional Bank

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

By analyzing existing cross correlation between Small Cap Value and Regional Bank Fund, you can compare the effects of market volatilities on Small Cap and Regional Bank 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 Regional Bank. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Regional Bank.

Diversification Opportunities for Small Cap and Regional Bank

0.86

Correlation Coefficient

Small Cap  Regional Bank

Very poor diversification

The 3 months correlation between Small and Regional is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Regional Bank Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Regional Bank 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 Value are associated (or correlated) with Regional Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Regional Bank has no effect on the direction of Small Cap i.e., Small Cap and Regional Bank go up and down completely randomly.

Pair Corralation between Small Cap and Regional Bank

Assuming the 90 days horizon Small Cap Value is expected to generate 1.0 times more return on investment than Regional Bank. However, Small Cap is 1.0 times more volatile than Regional Bank Fund. It trades about -0.44 of its potential returns per unit of risk. Regional Bank Fund is currently generating about -0.5 per unit of risk. If you would invest  1,986  in Small Cap Value on September 25, 2024 and sell it today you would lose (305.00) from holding Small Cap Value or give up 15.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.24%
Values	Daily Returns

Small Cap Value  vs.  Regional Bank Fund

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Regional Bank

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Regional Bank Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Regional Bank 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 Regional Bank

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

The idea behind Small Cap Value and Regional Bank 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.