Correlation Between Small Cap and Intermediate Government

Can any of the company-specific risk be diversified away by investing in both Small Cap and Intermediate Government 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 Intermediate Government into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Small Cap Value Fund and Intermediate Government Bond, you can compare the effects of market volatilities on Small Cap and Intermediate Government 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 Intermediate Government. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Intermediate Government.

Diversification Opportunities for Small Cap and Intermediate Government

0.4

Correlation Coefficient

Small Cap  Intermediate Government

Very weak diversification

The 3 months correlation between Small and Intermediate is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Intermediate Government Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Intermediate Government 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 Fund are associated (or correlated) with Intermediate Government. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Intermediate Government has no effect on the direction of Small Cap i.e., Small Cap and Intermediate Government go up and down completely randomly.

Pair Corralation between Small Cap and Intermediate Government

Assuming the 90 days horizon Small Cap Value Fund is expected to under-perform the Intermediate Government. In addition to that, Small Cap is 23.7 times more volatile than Intermediate Government Bond. It trades about -0.43 of its total potential returns per unit of risk. Intermediate Government Bond is currently generating about -0.22 per unit of volatility. If you would invest  947.00  in Intermediate Government Bond on September 27, 2024 and sell it today you would lose (3.00) from holding Intermediate Government Bond or give up 0.32% of portfolio value over 90 days.

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

Small Cap Value Fund  vs.  Intermediate Government Bond

Small Cap Value

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Value Fund 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.

Intermediate Government

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Intermediate Government Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Intermediate Government 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 Intermediate Government

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

The idea behind Small Cap Value Fund and Intermediate Government Bond 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..