Correlation Between Intermediate-term and Small Cap
Can any of the company-specific risk be diversified away by investing in both Intermediate-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 Intermediate-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 Intermediate Term Bond Fund and Small Cap Stock, you can compare the effects of market volatilities on Intermediate-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 Intermediate-term with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Intermediate-term and Small Cap.
Diversification Opportunities for Intermediate-term and Small Cap
-0.55 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Intermediate-term and Small is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Term Bond Fund and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock and Intermediate-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 Intermediate Term Bond 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 Stock has no effect on the direction of Intermediate-term i.e., Intermediate-term and Small Cap go up and down completely randomly.
Pair Corralation between Intermediate-term and Small Cap
Assuming the 90 days horizon Intermediate-term is expected to generate 14.91 times less return on investment than Small Cap. But when comparing it to its historical volatility, Intermediate Term Bond Fund is 4.77 times less risky than Small Cap. It trades about 0.06 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest 1,419 in Small Cap Stock on August 29, 2024 and sell it today you would earn a total of 94.00 from holding Small Cap Stock or generate 6.62% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Intermediate Term Bond Fund vs. Small Cap Stock
Performance |
| Timeline |
| Intermediate Term Bond |
| Small Cap Stock |
Intermediate-term and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Intermediate-term and Small Cap
The main advantage of trading using opposite Intermediate-term and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Intermediate-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.| Intermediate-term vs. Usaa Nasdaq 100 | Intermediate-term vs. Usaa Intermediate Term | Intermediate-term vs. Usaa Tax Exempt | Intermediate-term vs. Victory Tax Exempt Fund |
| Small Cap vs. Income Fund Income | Small Cap vs. Usaa Nasdaq 100 | Small Cap vs. Victory Diversified Stock | Small Cap vs. Intermediate Term Bond 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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