Correlation Between Small Cap and Select Fund

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

Diversification Opportunities for Small Cap and Select Fund

0.8

Correlation Coefficient

Small Cap  Select Fund

Very poor diversification

The 3 months correlation between Small and Select is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Select Fund R in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Fund R 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 Select Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Fund R has no effect on the direction of Small Cap i.e., Small Cap and Select Fund go up and down completely randomly.

Pair Corralation between Small Cap and Select Fund

Assuming the 90 days horizon Small Cap Value is expected to generate 0.78 times more return on investment than Select Fund. However, Small Cap Value is 1.28 times less risky than Select Fund. It trades about -0.09 of its potential returns per unit of risk. Select Fund R is currently generating about -0.13 per unit of risk. If you would invest  1,036  in Small Cap Value on December 29, 2024 and sell it today you would lose (62.00) from holding Small Cap Value or give up 5.98% of portfolio value over 90 days.

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

Small Cap Value  vs.  Select Fund R

Small Cap Value

Risk-Adjusted Performance

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.

Select Fund R

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Small Cap and Select Fund

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

The idea behind Small Cap Value and Select Fund R 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 Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.