Correlation Between Alternative Credit and Small Company
Can any of the company-specific risk be diversified away by investing in both Alternative Credit and Small Company 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 Alternative Credit and Small Company into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Alternative Credit Income and Small Pany Value, you can compare the effects of market volatilities on Alternative Credit and Small Company 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 Alternative Credit with a short position of Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alternative Credit and Small Company.
Diversification Opportunities for Alternative Credit and Small Company
0.68 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Alternative and Small is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Alternative Credit Income and Small Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Value and Alternative Credit 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 Alternative Credit Income are associated (or correlated) with Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Value has no effect on the direction of Alternative Credit i.e., Alternative Credit and Small Company go up and down completely randomly.
Pair Corralation between Alternative Credit and Small Company
Assuming the 90 days horizon Alternative Credit is expected to generate 2.01 times less return on investment than Small Company. But when comparing it to its historical volatility, Alternative Credit Income is 5.21 times less risky than Small Company. It trades about 0.07 of its potential returns per unit of risk. Small Pany Value is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 2,574 in Small Pany Value on August 25, 2024 and sell it today you would earn a total of 349.00 from holding Small Pany Value or generate 13.56% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Alternative Credit Income vs. Small Pany Value
Performance |
| Timeline |
| Alternative Credit Income |
| Small Pany Value |
Alternative Credit and Small Company Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Alternative Credit and Small Company
The main advantage of trading using opposite Alternative Credit and Small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alternative Credit position performs unexpectedly, Small Company 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 Company will offset losses from the drop in Small Company's long position.| Alternative Credit vs. Vanguard Total Stock | Alternative Credit vs. Vanguard 500 Index | Alternative Credit vs. Vanguard Total Stock | Alternative Credit vs. Vanguard Total Stock |
| Small Company vs. Small Pany Growth | Small Company vs. Large Pany Value | Small Company vs. Wilshire Large | Small Company vs. Small Pany Value |
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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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