Correlation Between Amazon and Smallcap World

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

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

Diversification Opportunities for Amazon and Smallcap World

0.62

Correlation Coefficient

Amazon  Smallcap World

Poor diversification

The 3 months correlation between Amazon and Smallcap is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Smallcap World Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap World and Amazon 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 Amazon Inc are associated (or correlated) with Smallcap World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap World has no effect on the direction of Amazon i.e., Amazon and Smallcap World go up and down completely randomly.

Pair Corralation between Amazon and Smallcap World

Given the investment horizon of 90 days Amazon Inc is expected to generate 2.28 times more return on investment than Smallcap World. However, Amazon is 2.28 times more volatile than Smallcap World Fund. It trades about 0.17 of its potential returns per unit of risk. Smallcap World Fund is currently generating about 0.14 per unit of risk. If you would invest  17,789  in Amazon Inc on September 5, 2024 and sell it today you would earn a total of  3,555  from holding Amazon Inc or generate 19.98% return on investment over 90 days.

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

Amazon Inc  vs.  Smallcap World Fund

Amazon Inc

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Amazon displayed solid returns over the last few months and may actually be approaching a breakup point.

Smallcap World

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Smallcap World may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Amazon and Smallcap World

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

The idea behind Amazon Inc and Smallcap World Fund 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.