Correlation Between Defensive Market and Small Cap
Can any of the company-specific risk be diversified away by investing in both Defensive Market 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 Defensive Market and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Defensive Market Strategies and Small Cap Equity, you can compare the effects of market volatilities on Defensive Market 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 Defensive Market with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Defensive Market and Small Cap.
Diversification Opportunities for Defensive Market and Small Cap
0.9 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Defensive and Small is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Defensive Market Strategies and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Defensive Market 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 Defensive Market Strategies 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 Equity has no effect on the direction of Defensive Market i.e., Defensive Market and Small Cap go up and down completely randomly.
Pair Corralation between Defensive Market and Small Cap
Assuming the 90 days horizon Defensive Market is expected to generate 3.84 times less return on investment than Small Cap. But when comparing it to its historical volatility, Defensive Market Strategies is 3.35 times less risky than Small Cap. It trades about 0.22 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest 1,872 in Small Cap Equity on August 29, 2024 and sell it today you would earn a total of 173.00 from holding Small Cap Equity or generate 9.24% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Defensive Market Strategies vs. Small Cap Equity
Performance |
| Timeline |
| Defensive Market Str |
| Small Cap Equity |
Defensive Market and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Defensive Market and Small Cap
The main advantage of trading using opposite Defensive Market and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Defensive Market 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.| Defensive Market vs. American Balanced Fund | Defensive Market vs. American Balanced Fund | Defensive Market vs. HUMANA INC | Defensive Market vs. Aquagold International |
| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. T Rowe Price | Small Cap vs. HUMANA INC | Small Cap vs. Aquagold International |
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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.
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