Correlation Between Small Cap and Real Estate

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

Diversification Opportunities for Small Cap and Real Estate

-0.07

Correlation Coefficient

Small Cap  Real Estate

Good diversification

The 3 months correlation between Small and Real is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Real Estate Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real Estate Fund 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 Real Estate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Estate Fund has no effect on the direction of Small Cap i.e., Small Cap and Real Estate go up and down completely randomly.

Pair Corralation between Small Cap and Real Estate

Assuming the 90 days horizon Small Cap Value is expected to under-perform the Real Estate. In addition to that, Small Cap is 1.02 times more volatile than Real Estate Fund. It trades about -0.06 of its total potential returns per unit of risk. Real Estate Fund is currently generating about 0.02 per unit of volatility. If you would invest  2,605  in Real Estate Fund on December 28, 2024 and sell it today you would earn a total of  32.00  from holding Real Estate Fund or generate 1.23% return on investment over 90 days.

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

Small Cap Value  vs.  Real Estate Fund

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.

Real Estate Fund

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Real Estate Fund are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Real Estate 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 Real Estate

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

The idea behind Small Cap Value and Real Estate Fund 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.