Correlation Between Legg Mason and Small Cap
Can any of the company-specific risk be diversified away by investing in both Legg Mason and Small Cap 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 Legg Mason and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Legg Mason Bw and Small Cap Stock, you can compare the effects of market volatilities on Legg Mason and Small Cap 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 Legg Mason with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Legg Mason and Small Cap.
Diversification Opportunities for Legg Mason and Small Cap
0.92 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Legg and Small is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Legg Mason Bw and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Legg Mason 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 Legg Mason Bw are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Legg Mason i.e., Legg Mason and Small Cap go up and down completely randomly.
Pair Corralation between Legg Mason and Small Cap
Assuming the 90 days horizon Legg Mason Bw is expected to generate 0.62 times more return on investment than Small Cap. However, Legg Mason Bw is 1.62 times less risky than Small Cap. It trades about 0.08 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.04 per unit of risk. If you would invest 1,792 in Legg Mason Bw on September 3, 2024 and sell it today you would earn a total of 582.00 from holding Legg Mason Bw or generate 32.48% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Legg Mason Bw vs. Small Cap Stock
Performance |
| Timeline |
| Legg Mason Bw |
| Small Cap Stock |
Legg Mason and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Legg Mason and Small Cap
The main advantage of trading using opposite Legg Mason and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Legg Mason position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.| Legg Mason vs. Vanguard Value Index | Legg Mason vs. Dodge Cox Stock | Legg Mason vs. American Funds American | Legg Mason vs. American Funds American |
| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index |
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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.
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