Correlation Between Prospect Capital and Capital Southwest

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

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

Diversification Opportunities for Prospect Capital and Capital Southwest

0.85

Correlation Coefficient

Prospect Capital  Capital Southwest

Very poor diversification

The 3 months correlation between Prospect and Capital is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Prospect Capital and Capital Southwest in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital Southwest and Prospect Capital 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 Prospect Capital are associated (or correlated) with Capital Southwest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital Southwest has no effect on the direction of Prospect Capital i.e., Prospect Capital and Capital Southwest go up and down completely randomly.

Pair Corralation between Prospect Capital and Capital Southwest

Given the investment horizon of 90 days Prospect Capital is expected to under-perform the Capital Southwest. In addition to that, Prospect Capital is 1.32 times more volatile than Capital Southwest. It trades about -0.02 of its total potential returns per unit of risk. Capital Southwest is currently generating about 0.07 per unit of volatility. If you would invest  1,396  in Capital Southwest on September 26, 2024 and sell it today you would earn a total of  742.00  from holding Capital Southwest or generate 53.15% return on investment over 90 days.

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

Prospect Capital  vs.  Capital Southwest

Prospect Capital

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prospect Capital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Capital Southwest

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital Southwest has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Prospect Capital and Capital Southwest

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

The idea behind Prospect Capital and Capital Southwest 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.