Correlation Between Royce Quant and Arrow DWA

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

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

Diversification Opportunities for Royce Quant and Arrow DWA

0.8

Correlation Coefficient

Royce Quant  Arrow DWA

Very poor diversification

The 3 months correlation between Royce and Arrow is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Royce Quant Small Cap and Arrow DWA Tactical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arrow DWA Tactical and Royce Quant 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 Royce Quant Small Cap are associated (or correlated) with Arrow DWA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arrow DWA Tactical has no effect on the direction of Royce Quant i.e., Royce Quant and Arrow DWA go up and down completely randomly.

Pair Corralation between Royce Quant and Arrow DWA

Given the investment horizon of 90 days Royce Quant Small Cap is expected to generate 1.6 times more return on investment than Arrow DWA. However, Royce Quant is 1.6 times more volatile than Arrow DWA Tactical. It trades about 0.15 of its potential returns per unit of risk. Arrow DWA Tactical is currently generating about 0.16 per unit of risk. If you would invest  4,018  in Royce Quant Small Cap on September 5, 2024 and sell it today you would earn a total of  529.00  from holding Royce Quant Small Cap or generate 13.17% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Royce Quant Small Cap  vs.  Arrow DWA Tactical

Royce Quant Small

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Quant Small Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal essential indicators, Royce Quant showed solid returns over the last few months and may actually be approaching a breakup point.

Arrow DWA Tactical

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Arrow DWA Tactical are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Arrow DWA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Royce Quant and Arrow DWA

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

The idea behind Royce Quant Small Cap and Arrow DWA Tactical 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.