Correlation Between Westwood Smidcap and Westwood Quality

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

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

Diversification Opportunities for Westwood Smidcap and Westwood Quality

0.94

Correlation Coefficient

Westwood Smidcap  Westwood Quality

Almost no diversification

The 3 months correlation between Westwood and Westwood is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Westwood Smidcap Fund and Westwood Quality Smallcap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westwood Quality Smallcap and Westwood Smidcap 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 Westwood Smidcap Fund are associated (or correlated) with Westwood Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westwood Quality Smallcap has no effect on the direction of Westwood Smidcap i.e., Westwood Smidcap and Westwood Quality go up and down completely randomly.

Pair Corralation between Westwood Smidcap and Westwood Quality

Assuming the 90 days horizon Westwood Smidcap Fund is expected to generate 0.79 times more return on investment than Westwood Quality. However, Westwood Smidcap Fund is 1.26 times less risky than Westwood Quality. It trades about 0.17 of its potential returns per unit of risk. Westwood Quality Smallcap is currently generating about 0.11 per unit of risk. If you would invest  1,569  in Westwood Smidcap Fund on September 3, 2024 and sell it today you would earn a total of  175.00  from holding Westwood Smidcap Fund or generate 11.15% return on investment over 90 days.

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

Westwood Smidcap Fund  vs.  Westwood Quality Smallcap

Westwood Smidcap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Westwood Smidcap Fund are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak primary indicators, Westwood Smidcap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Westwood Quality Smallcap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Westwood Quality Smallcap are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Westwood Quality may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Westwood Smidcap and Westwood Quality

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

The idea behind Westwood Smidcap Fund and Westwood Quality Smallcap 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.