Correlation Between Smallcap Growth and Preferred Securities

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Can any of the company-specific risk be diversified away by investing in both Smallcap Growth and Preferred Securities 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 Smallcap Growth and Preferred Securities into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Smallcap Growth Fund and Preferred Securities Fund, you can compare the effects of market volatilities on Smallcap Growth and Preferred Securities 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 Smallcap Growth with a short position of Preferred Securities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap Growth and Preferred Securities.

Diversification Opportunities for Smallcap Growth and Preferred Securities

0.6
  Correlation Coefficient

Poor diversification

The 3 months correlation between Smallcap and Preferred is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap Growth Fund and Preferred Securities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Preferred Securities and Smallcap Growth 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 Smallcap Growth Fund are associated (or correlated) with Preferred Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Preferred Securities has no effect on the direction of Smallcap Growth i.e., Smallcap Growth and Preferred Securities go up and down completely randomly.

Pair Corralation between Smallcap Growth and Preferred Securities

Assuming the 90 days horizon Smallcap Growth Fund is expected to generate 3.56 times more return on investment than Preferred Securities. However, Smallcap Growth is 3.56 times more volatile than Preferred Securities Fund. It trades about 0.06 of its potential returns per unit of risk. Preferred Securities Fund is currently generating about 0.09 per unit of risk. If you would invest  1,269  in Smallcap Growth Fund on August 25, 2024 and sell it today you would earn a total of  438.00  from holding Smallcap Growth Fund or generate 34.52% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Smallcap Growth Fund  vs.  Preferred Securities Fund

 Performance 
       Timeline  
Smallcap Growth 

Risk-Adjusted Performance

9 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap Growth Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Smallcap Growth may actually be approaching a critical reversion point that can send shares even higher in December 2024.
Preferred Securities 

Risk-Adjusted Performance

10 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Preferred Securities Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Preferred Securities is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Smallcap Growth and Preferred Securities Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Smallcap Growth and Preferred Securities

The main advantage of trading using opposite Smallcap Growth and Preferred Securities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap Growth position performs unexpectedly, Preferred Securities 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 Preferred Securities will offset losses from the drop in Preferred Securities' long position.
The idea behind Smallcap Growth Fund and Preferred Securities Fund pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
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 Anywhere module to track or share privately all of your investments from the convenience of any device.

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