Correlation Between Small Cap and High Income
Can any of the company-specific risk be diversified away by investing in both Small Cap and High Income 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 High Income 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 High Income Fund, you can compare the effects of market volatilities on Small Cap and High Income 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 High Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and High Income.
Diversification Opportunities for Small Cap and High Income
0.57 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Small and High is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and High Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on High Income 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 High Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of High Income Fund has no effect on the direction of Small Cap i.e., Small Cap and High Income go up and down completely randomly.
Pair Corralation between Small Cap and High Income
Assuming the 90 days horizon Small Cap Equity is expected to generate 9.38 times more return on investment than High Income. However, Small Cap is 9.38 times more volatile than High Income Fund. It trades about 0.24 of its potential returns per unit of risk. High Income Fund is currently generating about 0.04 per unit of risk. If you would invest 1,868 in Small Cap Equity on August 31, 2024 and sell it today you would earn a total of 163.00 from holding Small Cap Equity or generate 8.73% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Equity vs. High Income Fund
Performance |
| Timeline |
| Small Cap Equity |
| High Income Fund |
Small Cap and High Income Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and High Income
The main advantage of trading using opposite Small Cap and High Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, High Income 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 High Income will offset losses from the drop in High Income's long position.| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. T Rowe Price | Small Cap vs. HUMANA INC |
| High Income vs. Sarofim Equity | High Income vs. Small Cap Equity | High Income vs. Calamos Global Equity | High Income vs. Ultra Short Fixed Income |
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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..
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