Correlation Between Small Cap and Rational Defensive
Can any of the company-specific risk be diversified away by investing in both Small Cap and Rational Defensive 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 Rational Defensive 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 Rational Defensive Growth, you can compare the effects of market volatilities on Small Cap and Rational Defensive 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 Rational Defensive. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Rational Defensive.
Diversification Opportunities for Small Cap and Rational Defensive
0.68 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Small and Rational is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Rational Defensive Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rational Defensive Growth 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 Rational Defensive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rational Defensive Growth has no effect on the direction of Small Cap i.e., Small Cap and Rational Defensive go up and down completely randomly.
Pair Corralation between Small Cap and Rational Defensive
Assuming the 90 days horizon Small Cap is expected to generate 1.88 times less return on investment than Rational Defensive. In addition to that, Small Cap is 1.59 times more volatile than Rational Defensive Growth. It trades about 0.09 of its total potential returns per unit of risk. Rational Defensive Growth is currently generating about 0.26 per unit of volatility. If you would invest 2,928 in Rational Defensive Growth on September 12, 2024 and sell it today you would earn a total of 436.00 from holding Rational Defensive Growth or generate 14.89% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Equity vs. Rational Defensive Growth
Performance |
| Timeline |
| Small Cap Equity |
| Rational Defensive Growth |
Small Cap and Rational Defensive Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Rational Defensive
The main advantage of trading using opposite Small Cap and Rational Defensive positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Rational Defensive 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 Rational Defensive will offset losses from the drop in Rational Defensive's long position.| Small Cap vs. Elfun Government Money | Small Cap vs. General Money Market | Small Cap vs. Ubs Money Series | Small Cap vs. Schwab Treasury Money |
| Rational Defensive vs. Sa Real Estate | Rational Defensive vs. Simt Real Estate | Rational Defensive vs. Franklin Real Estate | Rational Defensive vs. Guggenheim Risk Managed |
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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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