Correlation Between Small Cap and Inflation-protected
Can any of the company-specific risk be diversified away by investing in both Small Cap and Inflation-protected 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 Small Cap and Inflation-protected into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Stock and Inflation Protected Bond Fund, you can compare the effects of market volatilities on Small Cap and Inflation-protected 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 Small Cap with a short position of Inflation-protected. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Inflation-protected.
Diversification Opportunities for Small Cap and Inflation-protected
0.81 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Small and Inflation-protected is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Inflation Protected Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inflation Protected and Small Cap 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 Small Cap Stock are associated (or correlated) with Inflation-protected. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inflation Protected has no effect on the direction of Small Cap i.e., Small Cap and Inflation-protected go up and down completely randomly.
Pair Corralation between Small Cap and Inflation-protected
Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Inflation-protected. In addition to that, Small Cap is 2.48 times more volatile than Inflation Protected Bond Fund. It trades about -0.38 of its total potential returns per unit of risk. Inflation Protected Bond Fund is currently generating about -0.29 per unit of volatility. If you would invest 1,058 in Inflation Protected Bond Fund on October 12, 2024 and sell it today you would lose (38.00) from holding Inflation Protected Bond Fund or give up 3.59% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Stock vs. Inflation Protected Bond Fund
Performance |
| Timeline |
| Small Cap Stock |
| Inflation Protected |
Small Cap and Inflation-protected Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Inflation-protected
The main advantage of trading using opposite Small Cap and Inflation-protected positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Inflation-protected 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 Inflation-protected will offset losses from the drop in Inflation-protected's long position.| Small Cap vs. Manning Napier Diversified | Small Cap vs. Stone Ridge Diversified | Small Cap vs. Federated Hermes Conservative | Small Cap vs. Allianzgi Diversified Income |
| Inflation-protected vs. Wells Fargo Diversified | Inflation-protected vs. Small Cap Stock | Inflation-protected vs. Fulcrum Diversified Absolute | Inflation-protected vs. Allianzgi Diversified Income |
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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