Correlation Between Small Cap and Kinetics Small

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

Diversification Opportunities for Small Cap and Kinetics Small

0.9

Correlation Coefficient

Small Cap  Kinetics Small

Almost no diversification

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

Pair Corralation between Small Cap and Kinetics Small

Assuming the 90 days horizon Small Cap is expected to generate 4.27 times less return on investment than Kinetics Small. But when comparing it to its historical volatility, Small Cap Value is 1.45 times less risky than Kinetics Small. It trades about 0.13 of its potential returns per unit of risk. Kinetics Small Cap is currently generating about 0.38 of returns per unit of risk over similar time horizon. If you would invest  14,501  in Kinetics Small Cap on September 3, 2024 and sell it today you would earn a total of  8,297  from holding Kinetics Small Cap or generate 57.22% return on investment over 90 days.

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

Small Cap Value  vs.  Kinetics Small Cap

Small Cap Value

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Value are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Kinetics Small Cap

Risk-Adjusted Performance

30 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Kinetics Small Cap are ranked lower than 30 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Kinetics Small showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Small Cap and Kinetics Small

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

The idea behind Small Cap Value and Kinetics Small 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..