Correlation Between Investment Grade and Small Cap
Can any of the company-specific risk be diversified away by investing in both Investment Grade 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 Investment Grade and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Investment Grade Porate and Small Cap Equity, you can compare the effects of market volatilities on Investment Grade 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 Investment Grade with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Investment Grade and Small Cap.
Diversification Opportunities for Investment Grade and Small Cap
-0.62 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Investment and Small is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding Investment Grade Porate and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Investment Grade 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 Investment Grade Porate 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 Equity has no effect on the direction of Investment Grade i.e., Investment Grade and Small Cap go up and down completely randomly.
Pair Corralation between Investment Grade and Small Cap
Assuming the 90 days horizon Investment Grade is expected to generate 11.02 times less return on investment than Small Cap. But when comparing it to its historical volatility, Investment Grade Porate is 3.95 times less risky than Small Cap. It trades about 0.08 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest 1,872 in Small Cap Equity on August 28, 2024 and sell it today you would earn a total of 141.00 from holding Small Cap Equity or generate 7.53% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Investment Grade Porate vs. Small Cap Equity
Performance |
| Timeline |
| Investment Grade Porate |
| Small Cap Equity |
Investment Grade and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Investment Grade and Small Cap
The main advantage of trading using opposite Investment Grade and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Investment Grade 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.| Investment Grade vs. Columbia Small Cap | Investment Grade vs. Fidelity Small Cap | Investment Grade vs. Victory Rs Partners | Investment Grade vs. Ab Discovery Value |
| Small Cap vs. Commonwealth Real Estate | Small Cap vs. Jhancock Real Estate | Small Cap vs. Virtus Real Estate | Small Cap vs. Deutsche Real Estate |
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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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