Correlation Between Ultra-short Term and Small Cap
Can any of the company-specific risk be diversified away by investing in both Ultra-short Term 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 Ultra-short Term and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ultra Short Term Fixed and Small Cap Equity, you can compare the effects of market volatilities on Ultra-short Term 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 Ultra-short Term with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ultra-short Term and Small Cap.
Diversification Opportunities for Ultra-short Term and Small Cap
0.78 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Ultra-short and Small is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Ultra Short Term Fixed 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 Ultra-short Term 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 Ultra Short Term Fixed 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 Ultra-short Term i.e., Ultra-short Term and Small Cap go up and down completely randomly.
Pair Corralation between Ultra-short Term and Small Cap
Assuming the 90 days horizon Ultra-short Term is expected to generate 14.67 times less return on investment than Small Cap. But when comparing it to its historical volatility, Ultra Short Term Fixed is 35.3 times less risky than Small Cap. It trades about 0.54 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest 1,872 in Small Cap Equity on August 28, 2024 and sell it today you would earn a total of 141.00 from holding Small Cap Equity or generate 7.53% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Ultra Short Term Fixed vs. Small Cap Equity
Performance |
| Timeline |
| Ultra Short Term |
| Small Cap Equity |
Ultra-short Term and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ultra-short Term and Small Cap
The main advantage of trading using opposite Ultra-short Term and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ultra-short Term 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.| Ultra-short Term vs. Emerging Markets Equity | Ultra-short Term vs. Global Fixed Income | Ultra-short Term vs. Global Fixed Income | Ultra-short Term vs. Global Fixed Income |
| Small Cap vs. Franklin Government Money | Small Cap vs. Blackrock Funds Iii | Small Cap vs. Transamerica Funds | Small Cap vs. Massmutual Premier Funds |
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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.
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