Correlation Between World Energy and Small Cap

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

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

Diversification Opportunities for World Energy and Small Cap

0.76

Correlation Coefficient

World Energy  Small Cap

Poor diversification

The 3 months correlation between World and Small is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding World Energy Fund and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and World Energy 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 World Energy Fund 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 Value has no effect on the direction of World Energy i.e., World Energy and Small Cap go up and down completely randomly.

Pair Corralation between World Energy and Small Cap

Assuming the 90 days horizon World Energy Fund is expected to generate 0.68 times more return on investment than Small Cap. However, World Energy Fund is 1.47 times less risky than Small Cap. It trades about 0.09 of its potential returns per unit of risk. Small Cap Value is currently generating about -0.33 per unit of risk. If you would invest  1,464  in World Energy Fund on October 9, 2024 and sell it today you would earn a total of  29.00  from holding World Energy Fund or generate 1.98% return on investment over 90 days.

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

World Energy Fund  vs.  Small Cap Value

World Energy

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in World Energy Fund are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, World Energy may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with World Energy and Small Cap

The main advantage of trading using opposite World Energy and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if World Energy 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 World Energy Fund and Small Cap Value 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.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.