Correlation Between Small Cap and Basic Materials

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

Diversification Opportunities for Small Cap and Basic Materials

SmallBasicDiversified AwaySmallBasicDiversified Away100%
0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between Small and Basic is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Basic Materials Ultrasector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Basic Materials Ultr 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 Basic Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Basic Materials Ultr has no effect on the direction of Small Cap i.e., Small Cap and Basic Materials go up and down completely randomly.

Pair Corralation between Small Cap and Basic Materials

Assuming the 90 days horizon Small Cap Value is expected to generate 1.16 times more return on investment than Basic Materials. However, Small Cap is 1.16 times more volatile than Basic Materials Ultrasector. It trades about -0.01 of its potential returns per unit of risk. Basic Materials Ultrasector is currently generating about -0.17 per unit of risk. If you would invest  1,094  in Small Cap Value on October 20, 2024 and sell it today you would lose (14.00) from holding Small Cap Value or give up 1.28% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Small Cap Value  vs.  Basic Materials Ultrasector

 Performance 
JavaScript chart by amCharts 3.21.15NovDec2025 -20-15-10-505
JavaScript chart by amCharts 3.21.15ASVIX BMPIX
       Timeline  
Small Cap Value 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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.
JavaScript chart by amCharts 3.21.15NovDecJanDecJan10.51111.512
Basic Materials Ultr 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Basic Materials Ultrasector has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.
JavaScript chart by amCharts 3.21.15NovDecJanDecJan100105110115120125

Small Cap and Basic Materials Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.47-1.85-1.23-0.610.00.611.221.832.44 0.050.100.150.20
JavaScript chart by amCharts 3.21.15ASVIX BMPIX
       Returns  

Pair Trading with Small Cap and Basic Materials

The main advantage of trading using opposite Small Cap and Basic Materials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Basic Materials 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 Basic Materials will offset losses from the drop in Basic Materials' long position.
The idea behind Small Cap Value and Basic Materials Ultrasector 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.

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