Correlation Between Small Cap and Diversified Bond
Can any of the company-specific risk be diversified away by investing in both Small Cap and Diversified Bond 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 Diversified Bond into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Growth and Diversified Bond Fund, you can compare the effects of market volatilities on Small Cap and Diversified Bond 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 Diversified Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Diversified Bond.
Diversification Opportunities for Small Cap and Diversified Bond
-0.64 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Small and Diversified is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Diversified Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Bond 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 Growth are associated (or correlated) with Diversified Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Bond has no effect on the direction of Small Cap i.e., Small Cap and Diversified Bond go up and down completely randomly.
Pair Corralation between Small Cap and Diversified Bond
Assuming the 90 days horizon Small Cap Growth is expected to generate 3.81 times more return on investment than Diversified Bond. However, Small Cap is 3.81 times more volatile than Diversified Bond Fund. It trades about 0.12 of its potential returns per unit of risk. Diversified Bond Fund is currently generating about -0.1 per unit of risk. If you would invest 2,206 in Small Cap Growth on August 26, 2024 and sell it today you would earn a total of 195.00 from holding Small Cap Growth or generate 8.84% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Growth vs. Diversified Bond Fund
Performance |
| Timeline |
| Small Cap Growth |
| Diversified Bond |
Small Cap and Diversified Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Diversified Bond
The main advantage of trading using opposite Small Cap and Diversified Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Diversified Bond 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 Diversified Bond will offset losses from the drop in Diversified Bond's long position.| Small Cap vs. Small Cap Growth | Small Cap vs. Small Cap Growth | Small Cap vs. Baron International Growth |
| Diversified Bond vs. Mid Cap Value | Diversified Bond vs. Equity Growth Fund | Diversified Bond vs. Income Growth Fund | Diversified Bond vs. Emerging Markets Fund |
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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.
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