Correlation Between Morgan Stanley and Small Cap

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

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

Diversification Opportunities for Morgan Stanley and Small Cap

0.81

Correlation Coefficient

Morgan Stanley  Small Cap

Very poor diversification

The 3 months correlation between Morgan and Small is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Morgan Stanley and Small Cap Premium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Premium and Morgan Stanley 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 Morgan Stanley 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 Premium has no effect on the direction of Morgan Stanley i.e., Morgan Stanley and Small Cap go up and down completely randomly.

Pair Corralation between Morgan Stanley and Small Cap

Allowing for the 90-day total investment horizon Morgan Stanley is expected to under-perform the Small Cap. In addition to that, Morgan Stanley is 2.47 times more volatile than Small Cap Premium. It trades about -0.18 of its total potential returns per unit of risk. Small Cap Premium is currently generating about -0.03 per unit of volatility. If you would invest  2,456  in Small Cap Premium on September 17, 2024 and sell it today you would lose (7.00) from holding Small Cap Premium or give up 0.29% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Morgan Stanley  vs.  Small Cap Premium

Morgan Stanley

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Morgan Stanley are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Morgan Stanley unveiled solid returns over the last few months and may actually be approaching a breakup point.

Small Cap Premium

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Morgan Stanley and Small Cap

The main advantage of trading using opposite Morgan Stanley and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morgan Stanley 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 Morgan Stanley and Small Cap Premium 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.