Correlation Between Needham Small and Small Cap

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

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

Diversification Opportunities for Needham Small and Small Cap

0.7

Correlation Coefficient

Needham Small  Small Cap

Poor diversification

The 3 months correlation between Needham and Small is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Needham Small Cap and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Needham Small 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 Needham Small Cap 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 Stock has no effect on the direction of Needham Small i.e., Needham Small and Small Cap go up and down completely randomly.

Pair Corralation between Needham Small and Small Cap

Assuming the 90 days horizon Needham Small Cap is expected to generate 1.21 times more return on investment than Small Cap. However, Needham Small is 1.21 times more volatile than Small Cap Stock. It trades about 0.03 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.01 per unit of risk. If you would invest  1,767  in Needham Small Cap on September 22, 2024 and sell it today you would earn a total of  74.00  from holding Needham Small Cap or generate 4.19% return on investment over 90 days.

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

Needham Small Cap  vs.  Small Cap Stock

Needham Small Cap

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Needham Small Cap are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Needham Small is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Stock 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.

Pair Trading with Needham Small and Small Cap

The main advantage of trading using opposite Needham Small and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Needham Small 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 Needham Small Cap and Small Cap Stock 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.