Correlation Between Small Capitalization and Moderate Balanced

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

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

Diversification Opportunities for Small Capitalization and Moderate Balanced

0.96

Correlation Coefficient

Small Capitalization  Moderate Balanced

Almost no diversification

The 3 months correlation between Small and Moderate is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Moderate Balanced Allocation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Balanced and Small Capitalization 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 Capitalization Portfolio are associated (or correlated) with Moderate Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Balanced has no effect on the direction of Small Capitalization i.e., Small Capitalization and Moderate Balanced go up and down completely randomly.

Pair Corralation between Small Capitalization and Moderate Balanced

Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 2.83 times more return on investment than Moderate Balanced. However, Small Capitalization is 2.83 times more volatile than Moderate Balanced Allocation. It trades about 0.14 of its potential returns per unit of risk. Moderate Balanced Allocation is currently generating about 0.22 per unit of risk. If you would invest  108.00  in Small Capitalization Portfolio on September 3, 2024 and sell it today you would earn a total of  13.00  from holding Small Capitalization Portfolio or generate 12.04% return on investment over 90 days.

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

Small Capitalization Portfolio  vs.  Moderate Balanced Allocation

Small Capitalization

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Capitalization may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Moderate Balanced

Risk-Adjusted Performance

17 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Moderate Balanced Allocation are ranked lower than 17 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Moderate Balanced may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Small Capitalization and Moderate Balanced

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

The idea behind Small Capitalization Portfolio and Moderate Balanced Allocation 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.