Correlation Between Financial Services and Small Capitalization
Can any of the company-specific risk be diversified away by investing in both Financial Services and Small Capitalization 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 Financial Services and Small Capitalization into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Services Portfolio and Small Capitalization Portfolio, you can compare the effects of market volatilities on Financial Services and Small Capitalization 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 Financial Services with a short position of Small Capitalization. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Services and Small Capitalization.
Diversification Opportunities for Financial Services and Small Capitalization
0.84 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Financial and Small is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Financial Services Portfolio and Small Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Capitalization and Financial Services 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 Financial Services Portfolio are associated (or correlated) with Small Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Capitalization has no effect on the direction of Financial Services i.e., Financial Services and Small Capitalization go up and down completely randomly.
Pair Corralation between Financial Services and Small Capitalization
Assuming the 90 days horizon Financial Services Portfolio is expected to generate 0.73 times more return on investment than Small Capitalization. However, Financial Services Portfolio is 1.36 times less risky than Small Capitalization. It trades about 0.17 of its potential returns per unit of risk. Small Capitalization Portfolio is currently generating about 0.08 per unit of risk. If you would invest 929.00 in Financial Services Portfolio on August 25, 2024 and sell it today you would earn a total of 221.00 from holding Financial Services Portfolio or generate 23.79% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Financial Services Portfolio vs. Small Capitalization Portfolio
Performance |
| Timeline |
| Financial Services |
| Small Capitalization |
Financial Services and Small Capitalization Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Services and Small Capitalization
The main advantage of trading using opposite Financial Services and Small Capitalization positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Services position performs unexpectedly, Small Capitalization 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 Capitalization will offset losses from the drop in Small Capitalization's long position.| Financial Services vs. Rbc Microcap Value | Financial Services vs. Fa 529 Aggressive | Financial Services vs. Rbb Fund | Financial Services vs. Qs Large Cap |
| Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Vanguard Small Cap Index | Small Capitalization vs. Fidelity Small Cap |
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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.
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