Correlation Between Westwood Smallcap and Westwood High

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

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

Diversification Opportunities for Westwood Smallcap and Westwood High

0.76

Correlation Coefficient

Westwood Smallcap  Westwood High

Poor diversification

The 3 months correlation between Westwood and Westwood is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Westwood Smallcap Value and Westwood High Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westwood High Income and Westwood Smallcap 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 Smallcap Value are associated (or correlated) with Westwood High. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westwood High Income has no effect on the direction of Westwood Smallcap i.e., Westwood Smallcap and Westwood High go up and down completely randomly.

Pair Corralation between Westwood Smallcap and Westwood High

Assuming the 90 days horizon Westwood Smallcap Value is expected to generate 4.96 times more return on investment than Westwood High. However, Westwood Smallcap is 4.96 times more volatile than Westwood High Income. It trades about 0.12 of its potential returns per unit of risk. Westwood High Income is currently generating about 0.16 per unit of risk. If you would invest  2,143  in Westwood Smallcap Value on September 4, 2024 and sell it today you would earn a total of  207.00  from holding Westwood Smallcap Value or generate 9.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Westwood Smallcap Value  vs.  Westwood High Income

Westwood Smallcap Value

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Westwood Smallcap Value are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Westwood Smallcap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Westwood High Income

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Westwood High Income are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Westwood 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 Westwood Smallcap and Westwood High

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

The idea behind Westwood Smallcap Value and Westwood High Income 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.

Check out your portfolio center.

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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.