Correlation Between Small Cap and American Express
Can any of the company-specific risk be diversified away by investing in both Small Cap and American Express 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 Small Cap and American Express into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Core and American Express, you can compare the effects of market volatilities on Small Cap and American Express 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 Small Cap with a short position of American Express. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and American Express.
Diversification Opportunities for Small Cap and American Express
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Small and American is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and American Express in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Express and Small Cap 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 Small Cap Core are associated (or correlated) with American Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Express has no effect on the direction of Small Cap i.e., Small Cap and American Express go up and down completely randomly.
Pair Corralation between Small Cap and American Express
Assuming the 90 days horizon Small Cap is expected to generate 1.97 times less return on investment than American Express. But when comparing it to its historical volatility, Small Cap Core is 1.14 times less risky than American Express. It trades about 0.1 of its potential returns per unit of risk. American Express is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest 27,240 in American Express on August 23, 2024 and sell it today you would earn a total of 2,060 from holding American Express or generate 7.56% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Core vs. American Express
Performance |
| Timeline |
| Small Cap Core |
| American Express |
Small Cap and American Express Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and American Express
The main advantage of trading using opposite Small Cap and American Express positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, American Express 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 American Express will offset losses from the drop in American Express' long position.| Small Cap vs. Vanguard Mid Cap Index | Small Cap vs. Vanguard Total Bond | Small Cap vs. Vanguard Institutional Index | Small Cap vs. Vanguard Total International |
| American Express vs. Small Cap Core | American Express vs. Morningstar Unconstrained Allocation | American Express vs. Mutual Of America | American Express vs. Ep Emerging Markets |
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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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