Correlation Between Small Cap and Strategic Income

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

Diversification Opportunities for Small Cap and Strategic Income

-0.5
  Correlation Coefficient

Very good diversification

The 3 months correlation between Small and Strategic is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Strategic Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Income 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 Strategic Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Income has no effect on the direction of Small Cap i.e., Small Cap and Strategic Income go up and down completely randomly.

Pair Corralation between Small Cap and Strategic Income

Assuming the 90 days horizon Small Cap Growth is expected to under-perform the Strategic Income. In addition to that, Small Cap is 6.13 times more volatile than Strategic Income Fund. It trades about -0.03 of its total potential returns per unit of risk. Strategic Income Fund is currently generating about 0.2 per unit of volatility. If you would invest  894.00  in Strategic Income Fund on September 12, 2024 and sell it today you would earn a total of  7.00  from holding Strategic Income Fund or generate 0.78% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy95.45%
ValuesDaily Returns

Small Cap Growth  vs.  Strategic Income Fund

 Performance 
       Timeline  
Small Cap Growth 

Risk-Adjusted Performance

12 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 12 (%) 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 Income 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Strategic Income Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Strategic Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap and Strategic Income Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Small Cap and Strategic Income

The main advantage of trading using opposite Small Cap and Strategic Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Strategic Income 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 Income will offset losses from the drop in Strategic Income's long position.
The idea behind Small Cap Growth and Strategic Income 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.

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