Correlation Between Small Cap and Kensington Active

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

By analyzing existing cross correlation between Small Cap Dividend and Kensington Active Advantage, you can compare the effects of market volatilities on Small Cap and Kensington Active 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 Kensington Active. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Kensington Active.

Diversification Opportunities for Small Cap and Kensington Active

0.9

Correlation Coefficient

Small Cap  Kensington Active

Almost no diversification

The 3 months correlation between Small and Kensington is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Dividend and Kensington Active Advantage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Kensington Active 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 Dividend are associated (or correlated) with Kensington Active. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Kensington Active has no effect on the direction of Small Cap i.e., Small Cap and Kensington Active go up and down completely randomly.

Pair Corralation between Small Cap and Kensington Active

Assuming the 90 days horizon Small Cap Dividend is expected to under-perform the Kensington Active. In addition to that, Small Cap is 2.13 times more volatile than Kensington Active Advantage. It trades about -0.32 of its total potential returns per unit of risk. Kensington Active Advantage is currently generating about -0.01 per unit of volatility. If you would invest  1,012  in Kensington Active Advantage on September 23, 2024 and sell it today you would lose (1.00) from holding Kensington Active Advantage or give up 0.1% of portfolio value over 90 days.

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

Small Cap Dividend  vs.  Kensington Active Advantage

Small Cap Dividend

Risk-Adjusted Performance

0 of 100

Very Weak

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

Kensington Active

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Kensington Active Advantage are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Kensington Active is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Kensington Active

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

The idea behind Small Cap Dividend and Kensington Active Advantage 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.