Correlation Between Small Cap and Government Securities
Can any of the company-specific risk be diversified away by investing in both Small Cap and Government Securities 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 Government Securities 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 Government Securities Fund, you can compare the effects of market volatilities on Small Cap and Government Securities 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 Government Securities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Government Securities.
Diversification Opportunities for Small Cap and Government Securities
-0.54 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Small and Government is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Government Securities Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Securities 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 Government Securities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Securities has no effect on the direction of Small Cap i.e., Small Cap and Government Securities go up and down completely randomly.
Pair Corralation between Small Cap and Government Securities
Assuming the 90 days horizon Small Cap Stock is expected to generate 5.42 times more return on investment than Government Securities. However, Small Cap is 5.42 times more volatile than Government Securities Fund. It trades about 0.27 of its potential returns per unit of risk. Government Securities Fund is currently generating about 0.11 per unit of risk. If you would invest 1,391 in Small Cap Stock on September 1, 2024 and sell it today you would earn a total of 134.00 from holding Small Cap Stock or generate 9.63% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Small Cap Stock vs. Government Securities Fund
Performance |
| Timeline |
| Small Cap Stock |
| Government Securities |
Small Cap and Government Securities Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Government Securities
The main advantage of trading using opposite Small Cap and Government Securities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Government Securities 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 Government Securities will offset losses from the drop in Government Securities' long position.| Small Cap vs. Western Asset High | Small Cap vs. Needham Aggressive Growth | Small Cap vs. T Rowe Price | Small Cap vs. California High Yield Municipal |
| Government Securities vs. Capital Growth Fund | Government Securities vs. High Income Fund | Government Securities vs. International Fund International | Government Securities vs. Growth Income 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.
Other Complementary Tools
| Stock Tickers Use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites | |
| Portfolio Optimization Compute new portfolio that will generate highest expected return given your specified tolerance for risk | |
| Idea Optimizer Use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio | |
| Equity Analysis Research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities | |
| Bond Analysis Evaluate and analyze corporate bonds as a potential investment for your portfolios. |