Correlation Between Small Cap and Tax-managed
Can any of the company-specific risk be diversified away by investing in both Small Cap and Tax-managed 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 Tax-managed 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 Tax Managed Large Cap, you can compare the effects of market volatilities on Small Cap and Tax-managed 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 Tax-managed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Tax-managed.
Diversification Opportunities for Small Cap and Tax-managed
0.63 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Small and Tax-managed is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Tax Managed Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Managed Large 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 Tax-managed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Managed Large has no effect on the direction of Small Cap i.e., Small Cap and Tax-managed go up and down completely randomly.
Pair Corralation between Small Cap and Tax-managed
Assuming the 90 days horizon Small Cap Stock is expected to generate 1.22 times more return on investment than Tax-managed. However, Small Cap is 1.22 times more volatile than Tax Managed Large Cap. It trades about 0.13 of its potential returns per unit of risk. Tax Managed Large Cap is currently generating about 0.07 per unit of risk. If you would invest 1,338 in Small Cap Stock on October 25, 2024 and sell it today you would earn a total of 31.00 from holding Small Cap Stock or generate 2.32% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Stock vs. Tax Managed Large Cap
Performance |
| Timeline |
| Small Cap Stock |
| Tax Managed Large |
Small Cap and Tax-managed Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Tax-managed
The main advantage of trading using opposite Small Cap and Tax-managed positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Tax-managed 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 Tax-managed will offset losses from the drop in Tax-managed's long position.| Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index | Small Cap vs. Vanguard Small Cap Index |
| Tax-managed vs. Tax Managed Large Cap | Tax-managed vs. Tax Managed International Equity | Tax-managed vs. Tax Managed Large Cap | Tax-managed vs. Tax Managed International Equity |
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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .
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