Correlation Between Diversified Real and Smallcap Value

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

By analyzing existing cross correlation between Diversified Real Asset and Smallcap Value Fund, you can compare the effects of market volatilities on Diversified Real and Smallcap Value 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 Diversified Real with a short position of Smallcap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diversified Real and Smallcap Value.

Diversification Opportunities for Diversified Real and Smallcap Value

-0.45

Correlation Coefficient

Diversified Real  Smallcap Value

Very good diversification

The 3 months correlation between Diversified and Smallcap is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Real Asset and Smallcap Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Value and Diversified Real 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 Diversified Real Asset are associated (or correlated) with Smallcap Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Value has no effect on the direction of Diversified Real i.e., Diversified Real and Smallcap Value go up and down completely randomly.

Pair Corralation between Diversified Real and Smallcap Value

Assuming the 90 days horizon Diversified Real Asset is expected to under-perform the Smallcap Value. But the mutual fund apears to be less risky and, when comparing its historical volatility, Diversified Real Asset is 3.1 times less risky than Smallcap Value. The mutual fund trades about -0.1 of its potential returns per unit of risk. The Smallcap Value Fund is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,222  in Smallcap Value Fund on September 17, 2024 and sell it today you would earn a total of  94.00  from holding Smallcap Value Fund or generate 7.69% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	79.69%
Values	Daily Returns

Diversified Real Asset  vs.  Smallcap Value Fund

Diversified Real Asset

Risk-Adjusted Performance

0 of 100

Very Weak

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

Smallcap Value

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Smallcap Value Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly weak basic indicators, Smallcap Value may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Diversified Real and Smallcap Value

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

The idea behind Diversified Real Asset and Smallcap Value 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..