Correlation Between International Equity and Small Midcap

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

By analyzing existing cross correlation between International Equity Index and Small Midcap Dividend Income, you can compare the effects of market volatilities on International Equity and Small Midcap 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 International Equity with a short position of Small Midcap. Check out your portfolio center. Please also check ongoing floating volatility patterns of International Equity and Small Midcap.

Diversification Opportunities for International Equity and Small Midcap

-0.33

Correlation Coefficient

International Equity  Small Midcap

Very good diversification

The 3 months correlation between International and Small is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding International Equity Index and Small Midcap Dividend Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Midcap Dividend and International Equity 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 International Equity Index are associated (or correlated) with Small Midcap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Midcap Dividend has no effect on the direction of International Equity i.e., International Equity and Small Midcap go up and down completely randomly.

Pair Corralation between International Equity and Small Midcap

Assuming the 90 days horizon International Equity Index is expected to generate 0.69 times more return on investment than Small Midcap. However, International Equity Index is 1.45 times less risky than Small Midcap. It trades about -0.17 of its potential returns per unit of risk. Small Midcap Dividend Income is currently generating about -0.45 per unit of risk. If you would invest  1,163  in International Equity Index on September 23, 2024 and sell it today you would lose (33.00) from holding International Equity Index or give up 2.84% of portfolio value over 90 days.

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

International Equity Index  vs.  Small Midcap Dividend Income

International Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Small Midcap Dividend

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Midcap Dividend Income has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Small Midcap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with International Equity and Small Midcap

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

The idea behind International Equity Index and Small Midcap Dividend Income 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..