Correlation Between Short Duration and Small Cap

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

By analyzing existing cross correlation between Short Duration Inflation and Small Cap Value, you can compare the effects of market volatilities on Short Duration and Small Cap 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 Short Duration with a short position of Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Short Duration and Small Cap.

Diversification Opportunities for Short Duration and Small Cap

0.27

Correlation Coefficient

Short Duration  Small Cap

Modest diversification

The 3 months correlation between Short and Small is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Short Duration Inflation and Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Value and Short Duration 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 Short Duration Inflation are associated (or correlated) with Small Cap. 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 Short Duration i.e., Short Duration and Small Cap go up and down completely randomly.

Pair Corralation between Short Duration and Small Cap

Assuming the 90 days horizon Short Duration is expected to generate 1.7 times less return on investment than Small Cap. But when comparing it to its historical volatility, Short Duration Inflation is 8.97 times less risky than Small Cap. It trades about 0.16 of its potential returns per unit of risk. Small Cap Value is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1,008  in Small Cap Value on October 22, 2024 and sell it today you would earn a total of  72.00  from holding Small Cap Value or generate 7.14% return on investment over 90 days.

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

Short Duration Inflation  vs.  Small Cap Value

Short Duration Inflation

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Short Duration Inflation are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Short Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value 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.

Pair Trading with Short Duration and Small Cap

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

The idea behind Short Duration Inflation and Small Cap 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.

Check out your portfolio center.

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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.