Correlation Between Small Cap and Diversified Municipal
Can any of the company-specific risk be diversified away by investing in both Small Cap and Diversified Municipal 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 Diversified Municipal 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 Diversified Municipal Portfolio, you can compare the effects of market volatilities on Small Cap and Diversified Municipal 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 Diversified Municipal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Diversified Municipal.
Diversification Opportunities for Small Cap and Diversified Municipal
-0.36 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Small and Diversified is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Core and Diversified Municipal Portfoli in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diversified Municipal 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 Diversified Municipal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diversified Municipal has no effect on the direction of Small Cap i.e., Small Cap and Diversified Municipal go up and down completely randomly.
Pair Corralation between Small Cap and Diversified Municipal
Assuming the 90 days horizon Small Cap Core is expected to generate 9.1 times more return on investment than Diversified Municipal. However, Small Cap is 9.1 times more volatile than Diversified Municipal Portfolio. It trades about 0.1 of its potential returns per unit of risk. Diversified Municipal Portfolio is currently generating about 0.19 per unit of risk. If you would invest 1,038 in Small Cap Core on August 26, 2024 and sell it today you would earn a total of 423.00 from holding Small Cap Core or generate 40.75% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Core vs. Diversified Municipal Portfoli
Performance |
| Timeline |
| Small Cap Core |
| Diversified Municipal |
Small Cap and Diversified Municipal Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Diversified Municipal
The main advantage of trading using opposite Small Cap and Diversified Municipal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Diversified Municipal 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 Diversified Municipal will offset losses from the drop in Diversified Municipal's long position.| Small Cap vs. Ab Global E | Small Cap vs. Ab Global E | Small Cap vs. Ab Global E | Small Cap vs. Ab Minnesota Portfolio |
| Diversified Municipal vs. Ab Global E | Diversified Municipal vs. Ab Global E | Diversified Municipal vs. Ab Minnesota Portfolio | Diversified Municipal vs. Ab All Market |
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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.
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