Correlation Between Ab Discovery and Small Cap

Can any of the company-specific risk be diversified away by investing in both Ab Discovery and Small Cap 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 Ab Discovery and Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Ab Discovery Value and Small Cap Core, you can compare the effects of market volatilities on Ab Discovery and Small Cap 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 Ab Discovery with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ab Discovery and Small Cap.

Diversification Opportunities for Ab Discovery and Small Cap

0.96

Correlation Coefficient

Ab Discovery  Small Cap

Almost no diversification

The 3 months correlation between ABASX and Small is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Ab Discovery Value and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core and Ab Discovery 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 Ab Discovery Value are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Core has no effect on the direction of Ab Discovery i.e., Ab Discovery and Small Cap go up and down completely randomly.

Pair Corralation between Ab Discovery and Small Cap

Assuming the 90 days horizon Ab Discovery Value is expected to generate 1.06 times more return on investment than Small Cap. However, Ab Discovery is 1.06 times more volatile than Small Cap Core. It trades about -0.32 of its potential returns per unit of risk. Small Cap Core is currently generating about -0.37 per unit of risk. If you would invest  2,545  in Ab Discovery Value on September 30, 2024 and sell it today you would lose (462.00) from holding Ab Discovery Value or give up 18.15% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Ab Discovery Value  vs.  Small Cap Core

Ab Discovery Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ab Discovery Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Small Cap Core

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Core has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Ab Discovery and Small Cap

The main advantage of trading using opposite Ab Discovery and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ab Discovery position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.

The idea behind Ab Discovery Value and Small Cap Core pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.