Correlation Between Small Cap and Strategic Equity
Can any of the company-specific risk be diversified away by investing in both Small Cap and Strategic Equity 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 Strategic Equity 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 Strategic Equity Portfolio, you can compare the effects of market volatilities on Small Cap and Strategic Equity 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 Strategic Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Strategic Equity.
Diversification Opportunities for Small Cap and Strategic Equity
0.94 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Strategic is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and Strategic Equity Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Equity Por 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 Strategic Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Equity Por has no effect on the direction of Small Cap i.e., Small Cap and Strategic Equity go up and down completely randomly.
Pair Corralation between Small Cap and Strategic Equity
Assuming the 90 days horizon Small Cap Equity is expected to under-perform the Strategic Equity. In addition to that, Small Cap is 1.45 times more volatile than Strategic Equity Portfolio. It trades about -0.09 of its total potential returns per unit of risk. Strategic Equity Portfolio is currently generating about 0.08 per unit of volatility. If you would invest 2,711 in Strategic Equity Portfolio on December 2, 2024 and sell it today you would earn a total of 57.00 from holding Strategic Equity Portfolio or generate 2.1% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Equity vs. Strategic Equity Portfolio
Performance |
| Timeline |
| Small Cap Equity |
| Strategic Equity Por |
Small Cap and Strategic Equity Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Strategic Equity
The main advantage of trading using opposite Small Cap and Strategic Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Strategic Equity 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 Strategic Equity will offset losses from the drop in Strategic Equity's long position.| Small Cap vs. John Hancock Disciplined | ||
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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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.
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