Correlation Between Visa and Small Capitalization

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

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

Diversification Opportunities for Visa and Small Capitalization

0.78

Correlation Coefficient

Visa  Small Capitalization

Poor diversification

The 3 months correlation between Visa and Small is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization and Visa 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 Visa Class A are associated (or correlated) with Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Visa i.e., Visa and Small Capitalization go up and down completely randomly.

Pair Corralation between Visa and Small Capitalization

Taking into account the 90-day investment horizon Visa Class A is expected to generate 0.83 times more return on investment than Small Capitalization. However, Visa Class A is 1.21 times less risky than Small Capitalization. It trades about 0.1 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.08 per unit of risk. If you would invest  27,135  in Visa Class A on September 2, 2024 and sell it today you would earn a total of  4,373  from holding Visa Class A or generate 16.12% return on investment over 90 days.

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

Visa Class A  vs.  Small Capitalization Portfolio

Visa Class A

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Visa showed solid returns over the last few months and may actually be approaching a breakup point.

Small Capitalization

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Capitalization Portfolio are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Capitalization may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Visa and Small Capitalization

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

The idea behind Visa Class A and Small Capitalization Portfolio 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .