Correlation Between Small Cap and Short Duration

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

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

Diversification Opportunities for Small Cap and Short Duration

0.71

Correlation Coefficient

Small Cap  Short Duration

Poor diversification

The 3 months correlation between Small and Short is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Short Duration Inflation in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Short Duration Inflation 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 Value are associated (or correlated) with Short Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Short Duration Inflation has no effect on the direction of Small Cap i.e., Small Cap and Short Duration go up and down completely randomly.

Pair Corralation between Small Cap and Short Duration

Assuming the 90 days horizon Small Cap Value is expected to under-perform the Short Duration. In addition to that, Small Cap is 3.74 times more volatile than Short Duration Inflation. It trades about -0.19 of its total potential returns per unit of risk. Short Duration Inflation is currently generating about -0.13 per unit of volatility. If you would invest  1,050  in Short Duration Inflation on October 7, 2024 and sell it today you would lose (22.00) from holding Short Duration Inflation or give up 2.1% of portfolio value over 90 days.

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

Small Cap Value  vs.  Short Duration Inflation

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.

Short Duration Inflation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Short Duration Inflation has generated negative risk-adjusted returns adding no value to fund investors. 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.

Pair Trading with Small Cap and Short Duration

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

The idea behind Small Cap Value and Short Duration Inflation 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..