Correlation Between Limited Term and Small Cap
Can any of the company-specific risk be diversified away by investing in both Limited Term 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 Limited Term and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Limited Term Tax and Small Cap Core, you can compare the effects of market volatilities on Limited Term 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 Limited Term with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Limited Term and Small Cap.
Diversification Opportunities for Limited Term and Small Cap
-0.26 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Limited and Small is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding Limited Term Tax and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Limited Term 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 Limited Term Tax 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 Core has no effect on the direction of Limited Term i.e., Limited Term and Small Cap go up and down completely randomly.
Pair Corralation between Limited Term and Small Cap
Assuming the 90 days horizon Limited Term is expected to generate 5.52 times less return on investment than Small Cap. But when comparing it to its historical volatility, Limited Term Tax is 8.96 times less risky than Small Cap. It trades about 0.11 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 1,138 in Small Cap Core on August 31, 2024 and sell it today you would earn a total of 359.00 from holding Small Cap Core or generate 31.55% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Limited Term Tax vs. Small Cap Core
Performance |
| Timeline |
| Limited Term Tax |
| Small Cap Core |
Limited Term and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Limited Term and Small Cap
The main advantage of trading using opposite Limited Term and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Limited Term 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.| Limited Term vs. Virtus High Yield | Limited Term vs. Valic Company I | Limited Term vs. Gmo High Yield | Limited Term vs. Multi Manager High Yield |
| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. T Rowe Price | Small Cap vs. HUMANA INC | Small Cap vs. SCOR PK |
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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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