Correlation Between Industrials Portfolio and Small Cap
Can any of the company-specific risk be diversified away by investing in both Industrials Portfolio 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 Industrials Portfolio and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Industrials Portfolio Industrials and Small Cap Core, you can compare the effects of market volatilities on Industrials Portfolio 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 Industrials Portfolio with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Industrials Portfolio and Small Cap.
Diversification Opportunities for Industrials Portfolio and Small Cap
0.93 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Industrials and Small is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Industrials Portfolio Industri and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Industrials Portfolio 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 Industrials Portfolio Industrials 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 Core has no effect on the direction of Industrials Portfolio i.e., Industrials Portfolio and Small Cap go up and down completely randomly.
Pair Corralation between Industrials Portfolio and Small Cap
Assuming the 90 days horizon Industrials Portfolio Industrials is expected to generate 0.88 times more return on investment than Small Cap. However, Industrials Portfolio Industrials is 1.14 times less risky than Small Cap. It trades about 0.11 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.08 per unit of risk. If you would invest 2,960 in Industrials Portfolio Industrials on August 30, 2024 and sell it today you would earn a total of 1,664 from holding Industrials Portfolio Industrials or generate 56.22% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Industrials Portfolio Industri vs. Small Cap Core
Performance |
| Timeline |
| Industrials Portfolio |
| Small Cap Core |
Industrials Portfolio and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Industrials Portfolio and Small Cap
The main advantage of trading using opposite Industrials Portfolio and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Industrials Portfolio 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 Industrials Portfolio Industrials and Small Cap Core 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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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 Money Managers module to screen money managers from public funds and ETFs managed around the world.
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