Correlation Between Small Cap and Health Care

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

By analyzing existing cross correlation between Small Cap Value Profund and Health Care Ultrasector, you can compare the effects of market volatilities on Small Cap and Health Care 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 Health Care. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Health Care.

Diversification Opportunities for Small Cap and Health Care

-0.7

Correlation Coefficient

Small Cap  Health Care

Excellent diversification

The 3 months correlation between Small and Health is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Profund and Health Care Ultrasector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Health Care Ultrasector 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 Value Profund are associated (or correlated) with Health Care. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Health Care Ultrasector has no effect on the direction of Small Cap i.e., Small Cap and Health Care go up and down completely randomly.

Pair Corralation between Small Cap and Health Care

Assuming the 90 days horizon Small Cap Value Profund is expected to generate 1.19 times more return on investment than Health Care. However, Small Cap is 1.19 times more volatile than Health Care Ultrasector. It trades about 0.06 of its potential returns per unit of risk. Health Care Ultrasector is currently generating about -0.29 per unit of risk. If you would invest  11,093  in Small Cap Value Profund on September 19, 2024 and sell it today you would earn a total of  473.00  from holding Small Cap Value Profund or generate 4.26% return on investment over 90 days.

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

Small Cap Value Profund  vs.  Health Care Ultrasector

Small Cap Value

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Health Care Ultrasector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Health Care Ultrasector has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Small Cap and Health Care

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

The idea behind Small Cap Value Profund and Health Care Ultrasector 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.