Correlation Between Small Cap and Enhanced Fixed
Can any of the company-specific risk be diversified away by investing in both Small Cap and Enhanced Fixed 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 Small Cap and Enhanced Fixed into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Equity and Enhanced Fixed Income, you can compare the effects of market volatilities on Small Cap and Enhanced Fixed 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 Small Cap with a short position of Enhanced Fixed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Enhanced Fixed.
Diversification Opportunities for Small Cap and Enhanced Fixed
0.46 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Small and Enhanced is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Enhanced Fixed Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Enhanced Fixed Income and Small Cap 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 Small Cap Equity are associated (or correlated) with Enhanced Fixed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Enhanced Fixed Income has no effect on the direction of Small Cap i.e., Small Cap and Enhanced Fixed go up and down completely randomly.
Pair Corralation between Small Cap and Enhanced Fixed
Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Enhanced Fixed. In addition to that, Small Cap is 2.64 times more volatile than Enhanced Fixed Income. It trades about -0.27 of its total potential returns per unit of risk. Enhanced Fixed Income is currently generating about -0.27 per unit of volatility. If you would invest 1,021 in Enhanced Fixed Income on October 10, 2024 and sell it today you would lose (23.00) from holding Enhanced Fixed Income or give up 2.25% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Equity vs. Enhanced Fixed Income
Performance |
| Timeline |
| Small Cap Equity |
| Enhanced Fixed Income |
Small Cap and Enhanced Fixed Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Enhanced Fixed
The main advantage of trading using opposite Small Cap and Enhanced Fixed positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Enhanced Fixed 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 Enhanced Fixed will offset losses from the drop in Enhanced Fixed's long position.| Small Cap vs. T Rowe Price | Small Cap vs. Inverse High Yield | Small Cap vs. Fidelity Capital Income | Small Cap vs. Pace High Yield |
| Enhanced Fixed vs. Franklin Lifesmart Retirement | Enhanced Fixed vs. Moderately Aggressive Balanced | Enhanced Fixed vs. Transamerica Cleartrack Retirement | Enhanced Fixed vs. Tiaa Cref Lifestyle Moderate |
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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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