Correlation Between Tweedy Browne and Small Cap
Can any of the company-specific risk be diversified away by investing in both Tweedy Browne 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 Tweedy Browne and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Tweedy Browne Value and Small Cap Equity, you can compare the effects of market volatilities on Tweedy Browne 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 Tweedy Browne with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tweedy Browne and Small Cap.
Diversification Opportunities for Tweedy Browne and Small Cap
-0.41 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Tweedy and Small is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Tweedy Browne Value 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 Tweedy Browne 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 Tweedy Browne Value 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 Tweedy Browne i.e., Tweedy Browne and Small Cap go up and down completely randomly.
Pair Corralation between Tweedy Browne and Small Cap
Assuming the 90 days horizon Tweedy Browne is expected to generate 1.38 times less return on investment than Small Cap. But when comparing it to its historical volatility, Tweedy Browne Value is 1.94 times less risky than Small Cap. It trades about 0.06 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 1,509 in Small Cap Equity on September 12, 2024 and sell it today you would earn a total of 398.00 from holding Small Cap Equity or generate 26.38% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Tweedy Browne Value vs. Small Cap Equity
Performance |
| Timeline |
| Tweedy Browne Value |
| Small Cap Equity |
Tweedy Browne and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Tweedy Browne and Small Cap
The main advantage of trading using opposite Tweedy Browne and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tweedy Browne 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.| Tweedy Browne vs. Volumetric Fund Volumetric | Tweedy Browne vs. Balanced Fund Investor | Tweedy Browne vs. Small Cap Stock | Tweedy Browne vs. Nasdaq 100 Index Fund |
| Small Cap vs. Elfun Government Money | Small Cap vs. General Money Market | Small Cap vs. Ubs Money Series | Small Cap vs. Schwab Treasury Money |
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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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