Correlation Between Small Capitalization and Moderately Conservative
Can any of the company-specific risk be diversified away by investing in both Small Capitalization and Moderately Conservative 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 Capitalization and Moderately Conservative into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Capitalization Portfolio and Moderately Servative Balanced, you can compare the effects of market volatilities on Small Capitalization and Moderately Conservative 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 Capitalization with a short position of Moderately Conservative. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Capitalization and Moderately Conservative.
Diversification Opportunities for Small Capitalization and Moderately Conservative
0.91 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Small and Moderately is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Moderately Servative Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderately Conservative and Small Capitalization 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 Capitalization Portfolio are associated (or correlated) with Moderately Conservative. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderately Conservative has no effect on the direction of Small Capitalization i.e., Small Capitalization and Moderately Conservative go up and down completely randomly.
Pair Corralation between Small Capitalization and Moderately Conservative
Assuming the 90 days horizon Small Capitalization Portfolio is expected to generate 3.07 times more return on investment than Moderately Conservative. However, Small Capitalization is 3.07 times more volatile than Moderately Servative Balanced. It trades about 0.25 of its potential returns per unit of risk. Moderately Servative Balanced is currently generating about 0.33 per unit of risk. If you would invest 111.00 in Small Capitalization Portfolio on September 1, 2024 and sell it today you would earn a total of 10.00 from holding Small Capitalization Portfolio or generate 9.01% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 95.45% |
| Values | Daily Returns |
Small Capitalization Portfolio vs. Moderately Servative Balanced
Performance |
| Timeline |
| Small Capitalization |
| Moderately Conservative |
Small Capitalization and Moderately Conservative Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Capitalization and Moderately Conservative
The main advantage of trading using opposite Small Capitalization and Moderately Conservative positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Capitalization position performs unexpectedly, Moderately Conservative 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 Moderately Conservative will offset losses from the drop in Moderately Conservative's long position.The idea behind Small Capitalization Portfolio and Moderately Servative Balanced pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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