Correlation Between Small Cap and Foreign Value
Can any of the company-specific risk be diversified away by investing in both Small Cap and Foreign Value 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 Foreign Value into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Small Cap Index and Foreign Value Fund, you can compare the effects of market volatilities on Small Cap and Foreign Value 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 Foreign Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Foreign Value.
Diversification Opportunities for Small Cap and Foreign Value
-0.53 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Small and Foreign is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Index and Foreign Value Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Foreign 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 Index are associated (or correlated) with Foreign Value. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Foreign Value has no effect on the direction of Small Cap i.e., Small Cap and Foreign Value go up and down completely randomly.
Pair Corralation between Small Cap and Foreign Value
Assuming the 90 days horizon Small Cap Index is expected to generate 1.66 times more return on investment than Foreign Value. However, Small Cap is 1.66 times more volatile than Foreign Value Fund. It trades about 0.11 of its potential returns per unit of risk. Foreign Value Fund is currently generating about 0.02 per unit of risk. If you would invest 1,489 in Small Cap Index on September 2, 2024 and sell it today you would earn a total of 302.00 from holding Small Cap Index or generate 20.28% 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 Index vs. Foreign Value Fund
Performance |
| Timeline |
| Small Cap Index |
| Foreign Value |
Small Cap and Foreign Value Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Small Cap and Foreign Value
The main advantage of trading using opposite Small Cap and Foreign Value positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Foreign Value 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 Foreign Value will offset losses from the drop in Foreign Value's long position.| Small Cap vs. Mid Cap Index | Small Cap vs. Mid Cap Strategic | Small Cap vs. Valic Company I | Small Cap vs. Valic Company I |
| Foreign Value vs. Mid Cap Index | Foreign Value vs. Mid Cap Strategic | Foreign Value vs. Valic Company I | Foreign Value vs. Valic Company I |
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 Equity Valuation module to check real value of public entities based on technical and fundamental data.
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