Correlation Between Small Cap and Government Bond

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

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

Diversification Opportunities for Small Cap and Government Bond

-0.67

Correlation Coefficient

Small Cap  Government Bond

Excellent diversification

The 3 months correlation between Small and Government is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Government Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Government Bond 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 Growth are associated (or correlated) with Government Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Government Bond has no effect on the direction of Small Cap i.e., Small Cap and Government Bond go up and down completely randomly.

Pair Corralation between Small Cap and Government Bond

Assuming the 90 days horizon Small Cap Growth is expected to under-perform the Government Bond. In addition to that, Small Cap is 4.09 times more volatile than Government Bond Fund. It trades about -0.09 of its total potential returns per unit of risk. Government Bond Fund is currently generating about 0.13 per unit of volatility. If you would invest  911.00  in Government Bond Fund on December 30, 2024 and sell it today you would earn a total of  24.00  from holding Government Bond Fund or generate 2.63% return on investment over 90 days.

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

Small Cap Growth  vs.  Government Bond Fund

Small Cap Growth

Risk-Adjusted Performance

Very Weak

Over the last 90 days Small Cap Growth has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Government Bond

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Government Bond Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Government Bond 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 Government Bond

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

The idea behind Small Cap Growth and Government Bond 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.