Correlation Between Small Cap and Asia Pacific

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

Diversification Opportunities for Small Cap and Asia Pacific

0.29

Correlation Coefficient

Small Cap  Asia Pacific

Modest diversification

The 3 months correlation between Small and Asia is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Asia Pacific Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Asia Pacific Small 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 Asia Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Asia Pacific Small has no effect on the direction of Small Cap i.e., Small Cap and Asia Pacific go up and down completely randomly.

Pair Corralation between Small Cap and Asia Pacific

Assuming the 90 days horizon Small Cap Value is expected to generate 1.39 times more return on investment than Asia Pacific. However, Small Cap is 1.39 times more volatile than Asia Pacific Small. It trades about 0.02 of its potential returns per unit of risk. Asia Pacific Small is currently generating about -0.01 per unit of risk. If you would invest  953.00  in Small Cap Value on October 4, 2024 and sell it today you would earn a total of  88.00  from holding Small Cap Value or generate 9.23% return on investment over 90 days.

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

Small Cap Value  vs.  Asia Pacific Small

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.

Asia Pacific Small

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Asia Pacific Small 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 basic 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.

Pair Trading with Small Cap and Asia Pacific

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

The idea behind Small Cap Value and Asia Pacific Small 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.