Correlation Between Small Cap and Strategic Allocation

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

Diversification Opportunities for Small Cap and Strategic Allocation

0.88

Correlation Coefficient

Small Cap  Strategic Allocation

Very poor diversification

The 3 months correlation between Small and Strategic is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Strategic Allocation Moderate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Allocation 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 Strategic Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Allocation has no effect on the direction of Small Cap i.e., Small Cap and Strategic Allocation go up and down completely randomly.

Pair Corralation between Small Cap and Strategic Allocation

Assuming the 90 days horizon Small Cap Value is expected to generate 2.37 times more return on investment than Strategic Allocation. However, Small Cap is 2.37 times more volatile than Strategic Allocation Moderate. It trades about -0.03 of its potential returns per unit of risk. Strategic Allocation Moderate is currently generating about -0.1 per unit of risk. If you would invest  1,085  in Small Cap Value on October 8, 2024 and sell it today you would lose (41.00) from holding Small Cap Value or give up 3.78% 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.  Strategic Allocation Moderate

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.

Strategic Allocation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Strategic Allocation Moderate has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Strategic Allocation 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 Strategic Allocation

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

The idea behind Small Cap Value and Strategic Allocation Moderate 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.