Correlation Between Small Cap and Third Avenue
Can any of the company-specific risk be diversified away by investing in both Small Cap and Third Avenue 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 Third Avenue 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 Third Avenue Value, you can compare the effects of market volatilities on Small Cap and Third Avenue 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 Third Avenue. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Third Avenue.
Diversification Opportunities for Small Cap and Third Avenue
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Small and Third is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Third Avenue Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Third Avenue Value 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 Third Avenue. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Third Avenue Value has no effect on the direction of Small Cap i.e., Small Cap and Third Avenue go up and down completely randomly.
Pair Corralation between Small Cap and Third Avenue
Assuming the 90 days horizon Small Cap Stock is expected to under-perform the Third Avenue. In addition to that, Small Cap is 1.08 times more volatile than Third Avenue Value. It trades about -0.27 of its total potential returns per unit of risk. Third Avenue Value is currently generating about 0.05 per unit of volatility. If you would invest 5,924 in Third Avenue Value on November 27, 2024 and sell it today you would earn a total of 44.00 from holding Third Avenue Value or generate 0.74% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Stock vs. Third Avenue Value
Performance |
| Timeline |
| Small Cap Stock |
| Third Avenue Value |
Small Cap and Third Avenue Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Third Avenue
The main advantage of trading using opposite Small Cap and Third Avenue positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Third Avenue 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 Third Avenue will offset losses from the drop in Third Avenue's long position.| Small Cap vs. Forum Real Estate | Small Cap vs. Redwood Real Estate | Small Cap vs. Baron Real Estate | Small Cap vs. Short Real Estate |
| Third Avenue vs. Inflation Adjusted Bond Fund | Third Avenue vs. Credit Suisse Multialternative | Third Avenue vs. Lord Abbett Inflation | Third Avenue vs. Credit Suisse Multialternative |
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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.
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