Correlation Between Government Securities and Small Cap
Can any of the company-specific risk be diversified away by investing in both Government Securities 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 Government Securities and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Government Securities Fund and Small Cap Stock, you can compare the effects of market volatilities on Government Securities 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 Government Securities with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Government Securities and Small Cap.
Diversification Opportunities for Government Securities and Small Cap
-0.55 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Government and Small is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Government Securities 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 Government Securities 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 Government Securities 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 Government Securities i.e., Government Securities and Small Cap go up and down completely randomly.
Pair Corralation between Government Securities and Small Cap
Assuming the 90 days horizon Government Securities is expected to generate 14.48 times less return on investment than Small Cap. But when comparing it to its historical volatility, Government Securities Fund is 5.69 times less risky than Small Cap. It trades about 0.09 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest 1,451 in Small Cap Stock on August 28, 2024 and sell it today you would earn a total of 122.00 from holding Small Cap Stock or generate 8.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Government Securities Fund vs. Small Cap Stock
Performance |
| Timeline |
| Government Securities |
| Small Cap Stock |
Government Securities and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Government Securities and Small Cap
The main advantage of trading using opposite Government Securities and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Government Securities 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.| Government Securities vs. Capital Growth Fund | Government Securities vs. Emerging Markets Fund | Government Securities vs. High Income Fund | Government Securities vs. International Fund International |
| Small Cap vs. Capital Growth Fund | Small Cap vs. Emerging Markets Fund | Small Cap vs. High Income Fund | Small Cap vs. International Fund International |
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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.
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