Correlation Between Smallcap Growth and Balanced Strategy

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

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

Diversification Opportunities for Smallcap Growth and Balanced Strategy

0.44

Correlation Coefficient

Smallcap Growth  Balanced Strategy

Very weak diversification

The 3 months correlation between Smallcap and Balanced is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and Balanced Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Strategy and Smallcap Growth 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 Smallcap Growth Fund are associated (or correlated) with Balanced Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Strategy has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and Balanced Strategy go up and down completely randomly.

Pair Corralation between Smallcap Growth and Balanced Strategy

Assuming the 90 days horizon Smallcap Growth Fund is expected to generate 3.63 times more return on investment than Balanced Strategy. However, Smallcap Growth is 3.63 times more volatile than Balanced Strategy Fund. It trades about 0.16 of its potential returns per unit of risk. Balanced Strategy Fund is currently generating about 0.46 per unit of risk. If you would invest  1,628  in Smallcap Growth Fund on September 18, 2024 and sell it today you would earn a total of  49.00  from holding Smallcap Growth Fund or generate 3.01% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	90.0%
Values	Daily Returns

Smallcap Growth Fund  vs.  Balanced Strategy Fund

Smallcap Growth

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap Growth may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Balanced Strategy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Balanced Strategy Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Balanced Strategy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Smallcap Growth and Balanced Strategy

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

The idea behind Smallcap Growth Fund and Balanced Strategy 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.

Check out your portfolio center.

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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.