Correlation Between Short-term Government and Small Cap

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

By analyzing existing cross correlation between Short Term Government Fund and Small Cap Value, you can compare the effects of market volatilities on Short-term Government 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 Short-term Government with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Small Cap.

Diversification Opportunities for Short-term Government and Small Cap

-0.66

Correlation Coefficient

Short-term Government  Small Cap

Excellent diversification

The 3 months correlation between Short-term and Small is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Short-term Government 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 Short Term Government Fund 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 Value has no effect on the direction of Short-term Government i.e., Short-term Government and Small Cap go up and down completely randomly.

Pair Corralation between Short-term Government and Small Cap

Assuming the 90 days horizon Short Term Government Fund is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Short Term Government Fund is 12.31 times less risky than Small Cap. The mutual fund trades about -0.08 of its potential returns per unit of risk. The Small Cap Value is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,080  in Small Cap Value on September 5, 2024 and sell it today you would earn a total of  132.00  from holding Small Cap Value or generate 12.22% return on investment over 90 days.

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

Short Term Government Fund  vs.  Small Cap Value

Short Term Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Term Government Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Short-term Government is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Value

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Short-term Government and Small Cap

The main advantage of trading using opposite Short-term Government and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Government 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 Short Term Government Fund and Small Cap Value 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.