Correlation Between Small Cap and Inverse Sp

Can any of the company-specific risk be diversified away by investing in both Small Cap and Inverse Sp 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 Inverse Sp 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 Inverse Sp 500, you can compare the effects of market volatilities on Small Cap and Inverse Sp 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 Inverse Sp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Inverse Sp.

Diversification Opportunities for Small Cap and Inverse Sp

-0.9

Correlation Coefficient

Small Cap  Inverse Sp

Pay attention - limited upside

The 3 months correlation between Small and Inverse is -0.9. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Inverse Sp 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inverse Sp 500 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 Inverse Sp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inverse Sp 500 has no effect on the direction of Small Cap i.e., Small Cap and Inverse Sp go up and down completely randomly.

Pair Corralation between Small Cap and Inverse Sp

Assuming the 90 days horizon Small Cap Value is expected to under-perform the Inverse Sp. But the mutual fund apears to be less risky and, when comparing its historical volatility, Small Cap Value is 1.88 times less risky than Inverse Sp. The mutual fund trades about -0.07 of its potential returns per unit of risk. The Inverse Sp 500 is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  8,650  in Inverse Sp 500 on December 20, 2024 and sell it today you would earn a total of  818.00  from holding Inverse Sp 500 or generate 9.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	98.33%
Values	Daily Returns

Small Cap Value  vs.  Inverse Sp 500

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.

Inverse Sp 500

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Inverse Sp 500 are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental drivers, Inverse Sp may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Small Cap and Inverse Sp

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

The idea behind Small Cap Value and Inverse Sp 500 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.