Correlation Between Amazon and Small-cap Value

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

By analyzing existing cross correlation between Amazon Inc and Small Cap Value Profund, you can compare the effects of market volatilities on Amazon and Small-cap Value 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 Small-cap Value. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amazon and Small-cap Value.

Diversification Opportunities for Amazon and Small-cap Value

0.86

Correlation Coefficient

Amazon  Small-cap Value

Very poor diversification

The 3 months correlation between Amazon and Small-cap is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Small Cap Value Profund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value 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 Small-cap Value. 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 Amazon i.e., Amazon and Small-cap Value go up and down completely randomly.

Pair Corralation between Amazon and Small-cap Value

Given the investment horizon of 90 days Amazon is expected to generate 1.08 times less return on investment than Small-cap Value. In addition to that, Amazon is 1.14 times more volatile than Small Cap Value Profund. It trades about 0.23 of its total potential returns per unit of risk. Small Cap Value Profund is currently generating about 0.28 per unit of volatility. If you would invest  10,895  in Small Cap Value Profund on September 4, 2024 and sell it today you would earn a total of  1,080  from holding Small Cap Value Profund or generate 9.91% return on investment over 90 days.

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

Amazon Inc  vs.  Small Cap Value Profund

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.

Small Cap Value

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value Profund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Small-cap Value may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Amazon and Small-cap Value

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

The idea behind Amazon Inc and Small Cap Value Profund 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.