Correlation Between Small Cap and Pace Large

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

Diversification Opportunities for Small Cap and Pace Large

0.77

Correlation Coefficient

Small Cap  Pace Large

Poor diversification

The 3 months correlation between Small and Pace is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Value Fund and Pace Large Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pace Large Growth 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 Pace Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pace Large Growth has no effect on the direction of Small Cap i.e., Small Cap and Pace Large go up and down completely randomly.

Pair Corralation between Small Cap and Pace Large

Assuming the 90 days horizon Small Cap Value Fund is expected to generate 0.6 times more return on investment than Pace Large. However, Small Cap Value Fund is 1.66 times less risky than Pace Large. It trades about -0.19 of its potential returns per unit of risk. Pace Large Growth is currently generating about -0.13 per unit of risk. If you would invest  4,235  in Small Cap Value Fund on September 19, 2024 and sell it today you would lose (264.00) from holding Small Cap Value Fund or give up 6.23% of portfolio value over 90 days.

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

Small Cap Value Fund  vs.  Pace Large Growth

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 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.

Pace Large Growth

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pace Large Growth has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Pace Large 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 Pace Large

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

The idea behind Small Cap Value Fund and Pace Large Growth 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.