Correlation Between Quantitative and Small Cap

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Can any of the company-specific risk be diversified away by investing in both Quantitative 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 Quantitative and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Quantitative U S and Small Cap Equity, you can compare the effects of market volatilities on Quantitative 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 Quantitative with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Quantitative and Small Cap.

Diversification Opportunities for Quantitative and Small Cap

0.91
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Quantitative and Small is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Quantitative U S 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 Quantitative 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 Quantitative U S 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 Quantitative i.e., Quantitative and Small Cap go up and down completely randomly.

Pair Corralation between Quantitative and Small Cap

Assuming the 90 days horizon Quantitative U S is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Quantitative U S is 1.31 times less risky than Small Cap. The mutual fund trades about -0.09 of its potential returns per unit of risk. The Small Cap Equity is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  3,952  in Small Cap Equity on September 12, 2024 and sell it today you would lose (49.00) from holding Small Cap Equity or give up 1.24% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Quantitative U S  vs.  Small Cap Equity

 Performance 
       Timeline  
Quantitative U S 

Risk-Adjusted Performance

11 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Quantitative U S are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Quantitative is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Small Cap Equity 

Risk-Adjusted Performance

10 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Quantitative and Small Cap Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Quantitative and Small Cap

The main advantage of trading using opposite Quantitative and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Quantitative 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 Quantitative U S and Small Cap Equity 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.
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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.

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