Correlation Between Sustainable Equity and Small Cap

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

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

Diversification Opportunities for Sustainable Equity and Small Cap

0.75

Correlation Coefficient

Sustainable Equity  Small Cap

Poor diversification

The 3 months correlation between Sustainable and Small is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Sustainable Equity Fund 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 Sustainable Equity 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 Sustainable Equity 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 Growth has no effect on the direction of Sustainable Equity i.e., Sustainable Equity and Small Cap go up and down completely randomly.

Pair Corralation between Sustainable Equity and Small Cap

Assuming the 90 days horizon Sustainable Equity Fund is expected to under-perform the Small Cap. But the mutual fund apears to be less risky and, when comparing its historical volatility, Sustainable Equity Fund is 1.01 times less risky than Small Cap. The mutual fund trades about -0.05 of its potential returns per unit of risk. The Small Cap Growth is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  2,124  in Small Cap Growth on September 23, 2024 and sell it today you would earn a total of  39.00  from holding Small Cap Growth or generate 1.84% return on investment over 90 days.

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

Sustainable Equity Fund  vs.  Small Cap Growth

Sustainable Equity

Risk-Adjusted Performance

0 of 100

Very Weak

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

Small Cap Growth

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Growth are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. 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 Sustainable Equity and Small Cap

The main advantage of trading using opposite Sustainable Equity and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sustainable Equity 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 Sustainable Equity Fund 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.