Correlation Between Financial Services and Small Cap

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

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

Diversification Opportunities for Financial Services and Small Cap

0.87

Correlation Coefficient

Financial Services  Small Cap

Very poor diversification

The 3 months correlation between Financial and Small is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Financial Services 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 Financial Services Portfolio are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Financial Services i.e., Financial Services and Small Cap go up and down completely randomly.

Pair Corralation between Financial Services and Small Cap

Assuming the 90 days horizon Financial Services is expected to generate 1.07 times less return on investment than Small Cap. In addition to that, Financial Services is 1.06 times more volatile than Small Cap Stock. It trades about 0.11 of its total potential returns per unit of risk. Small Cap Stock is currently generating about 0.12 per unit of volatility. If you would invest  1,366  in Small Cap Stock on September 12, 2024 and sell it today you would earn a total of  131.00  from holding Small Cap Stock or generate 9.59% return on investment over 90 days.

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

Financial Services Portfolio  vs.  Small Cap Stock

Financial Services

Risk-Adjusted Performance

8 of 100

OK

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

Small Cap Stock

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Financial Services and Small Cap

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

The idea behind Financial Services Portfolio and Small Cap Stock 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.