Correlation Between Small Cap and California High

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

By analyzing existing cross correlation between Small Cap Stock and California High Yield Municipal, you can compare the effects of market volatilities on Small Cap and California High 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 California High. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and California High.

Diversification Opportunities for Small Cap and California High

0.17

Correlation Coefficient

Small Cap  California High

Average diversification

The 3 months correlation between Small and California is 0.17. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and California High Yield Municipa in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California High Yield 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 Stock are associated (or correlated) with California High. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California High Yield has no effect on the direction of Small Cap i.e., Small Cap and California High go up and down completely randomly.

Pair Corralation between Small Cap and California High

Assuming the 90 days horizon Small Cap Stock is expected to generate 4.47 times more return on investment than California High. However, Small Cap is 4.47 times more volatile than California High Yield Municipal. It trades about 0.07 of its potential returns per unit of risk. California High Yield Municipal is currently generating about -0.03 per unit of risk. If you would invest  1,416  in Small Cap Stock on September 17, 2024 and sell it today you would earn a total of  70.00  from holding Small Cap Stock or generate 4.94% return on investment over 90 days.

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

Small Cap Stock  vs.  California High Yield Municipa

Small Cap Stock

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

California High Yield

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Small Cap and California High

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

The idea behind Small Cap Stock and California High Yield Municipal 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.