Correlation Between Small Cap and Basic Materials

Can any of the company-specific risk be diversified away by investing in both Small Cap and Basic Materials 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 Basic Materials 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 Basic Materials Ultrasector, you can compare the effects of market volatilities on Small Cap and Basic Materials 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 Basic Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Basic Materials.

Diversification Opportunities for Small Cap and Basic Materials

-0.45

Correlation Coefficient

Small Cap  Basic Materials

Very good diversification

The 3 months correlation between Small and Basic is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Profund and Basic Materials Ultrasector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials Ultr 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 Basic Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basic Materials Ultr has no effect on the direction of Small Cap i.e., Small Cap and Basic Materials go up and down completely randomly.

Pair Corralation between Small Cap and Basic Materials

Assuming the 90 days horizon Small Cap Value Profund is expected to generate 1.06 times more return on investment than Basic Materials. However, Small Cap is 1.06 times more volatile than Basic Materials Ultrasector. It trades about 0.09 of its potential returns per unit of risk. Basic Materials Ultrasector is currently generating about -0.1 per unit of risk. If you would invest  8,498  in Small Cap Value Profund on September 17, 2024 and sell it today you would earn a total of  611.00  from holding Small Cap Value Profund or generate 7.19% return on investment over 90 days.

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

Small Cap Value Profund  vs.  Basic Materials Ultrasector

Small Cap Value

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 7 (%) 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.

Basic Materials Ultr

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Basic Materials Ultrasector has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's forward indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Small Cap and Basic Materials

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

The idea behind Small Cap Value Profund and Basic Materials 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.