Correlation Between Small Cap and Strategic Alternatives

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

Diversification Opportunities for Small Cap and Strategic Alternatives

0.79

Correlation Coefficient

Small Cap  Strategic Alternatives

Poor diversification

The 3 months correlation between Small and Strategic is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Strategic Alternatives Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Alternatives 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 Strategic Alternatives. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Alternatives has no effect on the direction of Small Cap i.e., Small Cap and Strategic Alternatives go up and down completely randomly.

Pair Corralation between Small Cap and Strategic Alternatives

Assuming the 90 days horizon Small Cap Stock is expected to generate 7.18 times more return on investment than Strategic Alternatives. However, Small Cap is 7.18 times more volatile than Strategic Alternatives Fund. It trades about 0.13 of its potential returns per unit of risk. Strategic Alternatives Fund is currently generating about 0.15 per unit of risk. If you would invest  1,387  in Small Cap Stock on September 3, 2024 and sell it today you would earn a total of  142.00  from holding Small Cap Stock or generate 10.24% return on investment over 90 days.

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

Small Cap Stock  vs.  Strategic Alternatives Fund

Small Cap Stock

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Stock are ranked lower than 9 (%) 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.

Strategic Alternatives

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Strategic Alternatives Fund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Strategic Alternatives 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 Strategic Alternatives

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

The idea behind Small Cap Stock and Strategic Alternatives Fund 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.