Correlation Between Small Cap and Pzena International

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

Diversification Opportunities for Small Cap and Pzena International

-0.47

Correlation Coefficient

Small Cap  Pzena International

Very good diversification

The 3 months correlation between Small and Pzena is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Growth and Pzena International Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pzena International Value 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 Pzena International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pzena International Value has no effect on the direction of Small Cap i.e., Small Cap and Pzena International go up and down completely randomly.

Pair Corralation between Small Cap and Pzena International

Assuming the 90 days horizon Small Cap Growth is expected to under-perform the Pzena International. In addition to that, Small Cap is 1.23 times more volatile than Pzena International Value. It trades about -0.07 of its total potential returns per unit of risk. Pzena International Value is currently generating about 0.19 per unit of volatility. If you would invest  1,010  in Pzena International Value on December 27, 2024 and sell it today you would earn a total of  131.00  from holding Pzena International Value or generate 12.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Small Cap Growth  vs.  Pzena International Value

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 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.

Pzena International Value

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Pzena International Value are ranked lower than 15 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Pzena International showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and Pzena International

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

The idea behind Small Cap Growth and Pzena International Value 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.