Correlation Between Ford and Small Cap
Can any of the company-specific risk be diversified away by investing in both Ford 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 Ford and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and Small Cap Value Fund, you can compare the effects of market volatilities on Ford 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 Ford with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Small Cap.
Diversification Opportunities for Ford and Small Cap
Poor diversification
The 3 months correlation between Ford and Small is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Small Cap Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Ford 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 Ford Motor 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 Value has no effect on the direction of Ford i.e., Ford and Small Cap go up and down completely randomly.
Pair Corralation between Ford and Small Cap
Taking into account the 90-day investment horizon Ford is expected to generate 1.04 times less return on investment than Small Cap. In addition to that, Ford is 1.09 times more volatile than Small Cap Value Fund. It trades about 0.23 of its total potential returns per unit of risk. Small Cap Value Fund is currently generating about 0.26 per unit of volatility. If you would invest 3,969 in Small Cap Value Fund on September 1, 2024 and sell it today you would earn a total of 402.00 from holding Small Cap Value Fund or generate 10.13% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Ford Motor vs. Small Cap Value Fund
Performance |
| Timeline |
| Ford Motor |
| Small Cap Value |
Ford and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ford and Small Cap
The main advantage of trading using opposite Ford and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford 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.The idea behind Ford Motor and Small Cap Value 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.| Small Cap vs. Siit High Yield | Small Cap vs. Franklin High Income | Small Cap vs. T Rowe Price | Small Cap vs. Strategic Allocation Aggressive |
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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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