Correlation Between Small Cap and Tax-managed

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

Diversification Opportunities for Small Cap and Tax-managed

0.98

Correlation Coefficient

Small Cap  Tax-managed

Almost no diversification

The 3 months correlation between SMALL and Tax-managed is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value and Tax Managed Mid Small in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tax Managed Mid 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 Tax-managed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tax Managed Mid has no effect on the direction of Small Cap i.e., Small Cap and Tax-managed go up and down completely randomly.

Pair Corralation between Small Cap and Tax-managed

Assuming the 90 days horizon Small Cap Value is expected to generate 1.2 times more return on investment than Tax-managed. However, Small Cap is 1.2 times more volatile than Tax Managed Mid Small. It trades about 0.13 of its potential returns per unit of risk. Tax Managed Mid Small is currently generating about 0.16 per unit of risk. If you would invest  1,099  in Small Cap Value on September 3, 2024 and sell it today you would earn a total of  120.00  from holding Small Cap Value or generate 10.92% 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.  Tax Managed Mid Small

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.

Tax Managed Mid

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tax Managed Mid Small are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Tax-managed may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Small Cap and Tax-managed

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

The idea behind Small Cap Value and Tax Managed Mid 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.

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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.