Correlation Between Short-term Government and Small Cap
Can any of the company-specific risk be diversified away by investing in both Short-term Government 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 Short-term Government and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Short Term Government Fund and Small Cap Value, you can compare the effects of market volatilities on Short-term Government 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 Short-term Government with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short-term Government and Small Cap.
Diversification Opportunities for Short-term Government and Small Cap
-0.65 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Short-term and Small is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Short Term Government Fund and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Short-term Government 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 Short Term Government Fund 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 Value has no effect on the direction of Short-term Government i.e., Short-term Government and Small Cap go up and down completely randomly.
Pair Corralation between Short-term Government and Small Cap
Assuming the 90 days horizon Short Term Government Fund is not expected to generate positive returns. However, Short Term Government Fund is 17.25 times less risky than Small Cap. It waists most of its returns potential to compensate for thr risk taken. Small Cap is generating about 0.27 per unit of risk. If you would invest 985.00 in Small Cap Value on September 2, 2024 and sell it today you would earn a total of 99.00 from holding Small Cap Value or generate 10.05% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Short Term Government Fund vs. Small Cap Value
Performance |
| Timeline |
| Short Term Government |
| Small Cap Value |
Short-term Government and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Short-term Government and Small Cap
The main advantage of trading using opposite Short-term Government and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Short-term Government 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.| Short-term Government vs. Mid Cap Value | Short-term Government vs. Equity Growth Fund | Short-term Government vs. Income Growth Fund | Short-term Government vs. Diversified Bond Fund |
| Small Cap vs. Value Fund Investor | Small Cap vs. Small Pany Fund | Small Cap vs. Mid Cap Value | Small Cap vs. Equity Income Fund |
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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.
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