Correlation Between State Street and Small Cap
Can any of the company-specific risk be diversified away by investing in both State Street and Small Cap 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 State Street and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between State Street Target and Small Cap Equity, you can compare the effects of market volatilities on State Street and Small Cap 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 State Street with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of State Street and Small Cap.
Diversification Opportunities for State Street and Small Cap
0.76 | Correlation Coefficient |
Poor diversification
The 3 months correlation between State and Small is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding State Street Target and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and State Street 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 State Street Target are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Equity has no effect on the direction of State Street i.e., State Street and Small Cap go up and down completely randomly.
Pair Corralation between State Street and Small Cap
Assuming the 90 days horizon State Street is expected to generate 1.7 times less return on investment than Small Cap. But when comparing it to its historical volatility, State Street Target is 1.81 times less risky than Small Cap. It trades about 0.11 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest 1,745 in Small Cap Equity on August 29, 2024 and sell it today you would earn a total of 286.00 from holding Small Cap Equity or generate 16.39% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
State Street Target vs. Small Cap Equity
Performance |
| Timeline |
| State Street Target |
| Small Cap Equity |
State Street and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with State Street and Small Cap
The main advantage of trading using opposite State Street and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if State Street position performs unexpectedly, Small Cap 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 Cap will offset losses from the drop in Small Cap's long position.| State Street vs. Small Cap Equity | State Street vs. Doubleline E Fixed | State Street vs. Artisan Select Equity | State Street vs. Ab Select Equity |
| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. T Rowe Price | Small Cap vs. HUMANA INC | Small Cap vs. Aquagold International |
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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.
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