Correlation Between Small Cap and Disciplined Growth

Can any of the company-specific risk be diversified away by investing in both Small Cap and Disciplined Growth 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 Disciplined Growth 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 Disciplined Growth Fund, you can compare the effects of market volatilities on Small Cap and Disciplined Growth 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 Disciplined Growth. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Disciplined Growth.

Diversification Opportunities for Small Cap and Disciplined Growth

0.29

Correlation Coefficient

Small Cap  Disciplined Growth

Modest diversification

The 3 months correlation between Small and Disciplined is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Disciplined Growth Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Disciplined Growth 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 Disciplined Growth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Disciplined Growth has no effect on the direction of Small Cap i.e., Small Cap and Disciplined Growth go up and down completely randomly.

Pair Corralation between Small Cap and Disciplined Growth

Assuming the 90 days horizon Small Cap Growth is expected to generate 0.13 times more return on investment than Disciplined Growth. However, Small Cap Growth is 7.66 times less risky than Disciplined Growth. It trades about -0.31 of its potential returns per unit of risk. Disciplined Growth Fund is currently generating about -0.18 per unit of risk. If you would invest  2,315  in Small Cap Growth on September 26, 2024 and sell it today you would lose (155.00) from holding Small Cap Growth or give up 6.7% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Small Cap Growth  vs.  Disciplined Growth Fund

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.

Disciplined Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Disciplined Growth Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Small Cap and Disciplined Growth

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

The idea behind Small Cap Growth and Disciplined Growth 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.