Correlation Between Focused Dynamic and Small Cap

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

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

Diversification Opportunities for Focused Dynamic and Small Cap

0.93

Correlation Coefficient

Focused Dynamic  Small Cap

Almost no diversification

The 3 months correlation between Focused and Small is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Focused Dynamic Growth and Small Cap Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Growth and Focused Dynamic 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 Focused Dynamic Growth 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 Growth has no effect on the direction of Focused Dynamic i.e., Focused Dynamic and Small Cap go up and down completely randomly.

Pair Corralation between Focused Dynamic and Small Cap

Assuming the 90 days horizon Focused Dynamic Growth is expected to generate 0.9 times more return on investment than Small Cap. However, Focused Dynamic Growth is 1.11 times less risky than Small Cap. It trades about 0.36 of its potential returns per unit of risk. Small Cap Growth is currently generating about 0.3 per unit of risk. If you would invest  6,310  in Focused Dynamic Growth on September 4, 2024 and sell it today you would earn a total of  609.00  from holding Focused Dynamic Growth or generate 9.65% return on investment over 90 days.

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

Focused Dynamic Growth  vs.  Small Cap Growth

Focused Dynamic Growth

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Focused Dynamic Growth are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Focused Dynamic showed solid returns over the last few months and may actually be approaching a breakup point.

Small Cap Growth

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Focused Dynamic and Small Cap

The main advantage of trading using opposite Focused Dynamic and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Focused Dynamic 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 Focused Dynamic Growth and Small Cap Growth 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.