Correlation Between Small Cap and New Economy
Can any of the company-specific risk be diversified away by investing in both Small Cap and New Economy 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 New Economy 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 New Economy Fund, you can compare the effects of market volatilities on Small Cap and New Economy 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 New Economy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and New Economy.
Diversification Opportunities for Small Cap and New Economy
0.79 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Small and NEW is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and New Economy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Economy Fund 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 New Economy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Economy Fund has no effect on the direction of Small Cap i.e., Small Cap and New Economy go up and down completely randomly.
Pair Corralation between Small Cap and New Economy
Assuming the 90 days horizon Small Cap Equity is expected to generate 0.9 times more return on investment than New Economy. However, Small Cap Equity is 1.11 times less risky than New Economy. It trades about 0.02 of its potential returns per unit of risk. New Economy Fund is currently generating about -0.02 per unit of risk. If you would invest 1,838 in Small Cap Equity on November 1, 2024 and sell it today you would earn a total of 27.00 from holding Small Cap Equity or generate 1.47% 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. New Economy Fund
Performance |
| Timeline |
| Small Cap Equity |
| New Economy Fund |
Small Cap and New Economy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and New Economy
The main advantage of trading using opposite Small Cap and New Economy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, New Economy 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 New Economy will offset losses from the drop in New Economy's long position.| Small Cap vs. First Trust Specialty | Small Cap vs. Blackstone Secured Lending | Small Cap vs. Financials Ultrasector Profund | Small Cap vs. Financials Ultrasector Profund |
| New Economy vs. Aqr Long Short Equity | New Economy vs. Enhanced Fixed Income | New Economy vs. Small Cap Equity | New Economy vs. Old Westbury Fixed |
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 Global Correlations module to find global opportunities by holding instruments from different markets.
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