Correlation Between Small Cap and Morgan Stanley

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

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

Diversification Opportunities for Small Cap and Morgan Stanley

0.81

Correlation Coefficient

Small Cap  Morgan Stanley

Very poor diversification

The 3 months correlation between Small and Morgan is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Premium and Morgan Stanley in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morgan Stanley and Small Cap 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 Small Cap Premium are associated (or correlated) with Morgan Stanley. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morgan Stanley has no effect on the direction of Small Cap i.e., Small Cap and Morgan Stanley go up and down completely randomly.

Pair Corralation between Small Cap and Morgan Stanley

Considering the 90-day investment horizon Small Cap is expected to generate 20.58 times less return on investment than Morgan Stanley. But when comparing it to its historical volatility, Small Cap Premium is 4.1 times less risky than Morgan Stanley. It trades about 0.04 of its potential returns per unit of risk. Morgan Stanley is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  9,906  in Morgan Stanley on September 17, 2024 and sell it today you would earn a total of  2,997  from holding Morgan Stanley or generate 30.25% return on investment over 90 days.

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

Small Cap Premium  vs.  Morgan Stanley

Small Cap Premium

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Morgan Stanley

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Morgan Stanley are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Morgan Stanley unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and Morgan Stanley

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

The idea behind Small Cap Premium and Morgan Stanley 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.