Correlation Between Small Capitalization and Financial Services
Can any of the company-specific risk be diversified away by investing in both Small Capitalization and Financial Services 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 Financial Services 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 Financial Services Portfolio, you can compare the effects of market volatilities on Small Capitalization and Financial Services 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 Financial Services. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Capitalization and Financial Services.
Diversification Opportunities for Small Capitalization and Financial Services
0.84 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Small and Financial is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Small Capitalization Portfolio and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services 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 Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of Small Capitalization i.e., Small Capitalization and Financial Services go up and down completely randomly.
Pair Corralation between Small Capitalization and Financial Services
Assuming the 90 days horizon Small Capitalization is expected to generate 1.15 times less return on investment than Financial Services. But when comparing it to its historical volatility, Small Capitalization Portfolio is 1.05 times less risky than Financial Services. It trades about 0.22 of its potential returns per unit of risk. Financial Services Portfolio is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest 1,058 in Financial Services Portfolio on August 25, 2024 and sell it today you would earn a total of 92.00 from holding Financial Services Portfolio or generate 8.7% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Capitalization Portfolio vs. Financial Services Portfolio
Performance |
| Timeline |
| Small Capitalization |
| Financial Services |
Small Capitalization and Financial Services Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Capitalization and Financial Services
The main advantage of trading using opposite Small Capitalization and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Capitalization position performs unexpectedly, Financial Services 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 Financial Services will offset losses from the drop in Financial Services' long position.The idea behind Small Capitalization Portfolio and Financial Services Portfolio 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.
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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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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