Correlation Between Smallcap World and Capital World
Can any of the company-specific risk be diversified away by investing in both Smallcap World and Capital World 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 Smallcap World and Capital World into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Smallcap World Fund and Capital World Bond, you can compare the effects of market volatilities on Smallcap World and Capital World 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 Smallcap World with a short position of Capital World. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Capital World.
Diversification Opportunities for Smallcap World and Capital World
0.88 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Smallcap and Capital is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Capital World Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital World Bond and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Capital World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital World Bond has no effect on the direction of Smallcap World i.e., Smallcap World and Capital World go up and down completely randomly.
Pair Corralation between Smallcap World and Capital World
Assuming the 90 days horizon Smallcap World Fund is expected to generate 2.52 times more return on investment than Capital World. However, Smallcap World is 2.52 times more volatile than Capital World Bond. It trades about 0.15 of its potential returns per unit of risk. Capital World Bond is currently generating about 0.14 per unit of risk. If you would invest 6,786 in Smallcap World Fund on November 3, 2024 and sell it today you would earn a total of 186.00 from holding Smallcap World Fund or generate 2.74% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Smallcap World Fund vs. Capital World Bond
Performance |
| Timeline |
| Smallcap World |
| Capital World Bond |
Smallcap World and Capital World Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Smallcap World and Capital World
The main advantage of trading using opposite Smallcap World and Capital World positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap World position performs unexpectedly, Capital World 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 Capital World will offset losses from the drop in Capital World's long position.| Smallcap World vs. Small Cap Value | Smallcap World vs. Great West Loomis Sayles | Smallcap World vs. Small Cap Value Fund | Smallcap World vs. Ultrasmall Cap Profund Ultrasmall Cap |
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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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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