Correlation Between Diversified Bond and Small Cap
Can any of the company-specific risk be diversified away by investing in both Diversified Bond and Small Cap 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 Diversified Bond and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Diversified Bond Fund and Small Cap Growth, you can compare the effects of market volatilities on Diversified Bond and Small Cap 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 Diversified Bond with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Diversified Bond and Small Cap.
Diversification Opportunities for Diversified Bond and Small Cap
-0.64 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Diversified and Small is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Diversified Bond Fund and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Diversified Bond 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 Diversified Bond Fund are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Growth has no effect on the direction of Diversified Bond i.e., Diversified Bond and Small Cap go up and down completely randomly.
Pair Corralation between Diversified Bond and Small Cap
Assuming the 90 days horizon Diversified Bond is expected to generate 7.78 times less return on investment than Small Cap. But when comparing it to its historical volatility, Diversified Bond Fund is 2.65 times less risky than Small Cap. It trades about 0.02 of its potential returns per unit of risk. Small Cap Growth is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 1,218 in Small Cap Growth on August 30, 2024 and sell it today you would earn a total of 495.00 from holding Small Cap Growth or generate 40.64% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Diversified Bond Fund vs. Small Cap Growth
Performance |
| Timeline |
| Diversified Bond |
| Small Cap Growth |
Diversified Bond and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Diversified Bond and Small Cap
The main advantage of trading using opposite Diversified Bond and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Diversified Bond position performs unexpectedly, Small Cap 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 Cap will offset losses from the drop in Small Cap's long position.| Diversified Bond vs. Icon Natural Resources | Diversified Bond vs. Firsthand Alternative Energy | Diversified Bond vs. Gamco Natural Resources | Diversified Bond vs. Calvert Global Energy |
| Small Cap vs. Pace High Yield | Small Cap vs. Morningstar Aggressive Growth | Small Cap vs. Strategic Allocation Aggressive | Small Cap vs. Western Asset High |
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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