Correlation Between Small Cap and Financial Services
Can any of the company-specific risk be diversified away by investing in both Small Cap and Financial Services 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 Financial Services 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 Financial Services Portfolio, you can compare the effects of market volatilities on Small Cap and Financial Services 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 Financial Services. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Financial Services.
Diversification Opportunities for Small Cap and Financial Services
0.88 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Small and Financial is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Financial Services Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Services 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 Financial Services. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Services has no effect on the direction of Small Cap i.e., Small Cap and Financial Services go up and down completely randomly.
Pair Corralation between Small Cap and Financial Services
Assuming the 90 days horizon Small Cap is expected to generate 1.44 times less return on investment than Financial Services. In addition to that, Small Cap is 1.39 times more volatile than Financial Services Portfolio. It trades about 0.07 of its total potential returns per unit of risk. Financial Services Portfolio is currently generating about 0.15 per unit of volatility. If you would invest 942.00 in Financial Services Portfolio on September 4, 2024 and sell it today you would earn a total of 360.00 from holding Financial Services Portfolio or generate 38.22% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.6% |
| Values | Daily Returns |
Small Cap Stock vs. Financial Services Portfolio
Performance |
| Timeline |
| Small Cap Stock |
| Financial Services |
Small Cap and Financial Services Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Financial Services
The main advantage of trading using opposite Small Cap and Financial Services positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Financial Services 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 Financial Services will offset losses from the drop in Financial Services' long position.| Small Cap vs. Income Fund Income | Small Cap vs. Usaa Nasdaq 100 | Small Cap vs. Intermediate Term Bond Fund | Small Cap vs. Usaa Intermediate Term |
| Financial Services vs. Small Cap Stock | Financial Services vs. Commonwealth Global Fund | Financial Services vs. Omni Small Cap Value | Financial Services vs. Eic Value 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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