Correlation Between Value Fund and Small Cap

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

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

Diversification Opportunities for Value Fund and Small Cap

0.77

Correlation Coefficient

Value Fund  Small Cap

Poor diversification

The 3 months correlation between Value and Small is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Value Fund A 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 Value Fund 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 Value Fund A 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 Value Fund i.e., Value Fund and Small Cap go up and down completely randomly.

Pair Corralation between Value Fund and Small Cap

Assuming the 90 days horizon Value Fund A is expected to under-perform the Small Cap. In addition to that, Value Fund is 1.02 times more volatile than Small Cap Value. It trades about -0.34 of its total potential returns per unit of risk. Small Cap Value is currently generating about -0.32 per unit of volatility. If you would invest  1,052  in Small Cap Value on September 22, 2024 and sell it today you would lose (129.00) from holding Small Cap Value or give up 12.26% of portfolio value over 90 days.

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

Value Fund A  vs.  Small Cap Value

Value Fund A

Risk-Adjusted Performance

0 of 100

Very Weak

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

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic 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 Value Fund and Small Cap

The main advantage of trading using opposite Value Fund and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Value Fund 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 Value Fund A 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.