Correlation Between Small Cap and Baird Small/mid

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

Diversification Opportunities for Small Cap and Baird Small/mid

0.93

Correlation Coefficient

Small Cap  Baird Small/mid

Almost no diversification

The 3 months correlation between Small and Baird is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Baird Smallmid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Baird Smallmid Cap 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 Baird Small/mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Baird Smallmid Cap has no effect on the direction of Small Cap i.e., Small Cap and Baird Small/mid go up and down completely randomly.

Pair Corralation between Small Cap and Baird Small/mid

Assuming the 90 days horizon Small Cap Value is expected to generate 0.87 times more return on investment than Baird Small/mid. However, Small Cap Value is 1.15 times less risky than Baird Small/mid. It trades about -0.05 of its potential returns per unit of risk. Baird Smallmid Cap is currently generating about -0.12 per unit of risk. If you would invest  1,052  in Small Cap Value on December 28, 2024 and sell it today you would lose (39.00) from holding Small Cap Value or give up 3.71% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.36%
Values	Daily Returns

Small Cap Value  vs.  Baird Smallmid Cap

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 basic indicators, Small Cap is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Baird Smallmid Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Baird Smallmid Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Small Cap and Baird Small/mid

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

The idea behind Small Cap Value and Baird Smallmid Cap 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.