Correlation Between Baron Small and Baron Discovery

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

By analyzing existing cross correlation between Baron Small Cap and Baron Discovery Fund, you can compare the effects of market volatilities on Baron Small and Baron Discovery 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 Baron Small with a short position of Baron Discovery. Check out your portfolio center. Please also check ongoing floating volatility patterns of Baron Small and Baron Discovery.

Diversification Opportunities for Baron Small and Baron Discovery

0.68

Correlation Coefficient

Baron Small  Baron Discovery

Poor diversification

The 3 months correlation between Baron and Baron is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Baron Small Cap and Baron Discovery Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Baron Discovery and Baron Small 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 Baron Small Cap are associated (or correlated) with Baron Discovery. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Baron Discovery has no effect on the direction of Baron Small i.e., Baron Small and Baron Discovery go up and down completely randomly.

Pair Corralation between Baron Small and Baron Discovery

Assuming the 90 days horizon Baron Small Cap is expected to under-perform the Baron Discovery. But the mutual fund apears to be less risky and, when comparing its historical volatility, Baron Small Cap is 1.4 times less risky than Baron Discovery. The mutual fund trades about -0.09 of its potential returns per unit of risk. The Baron Discovery Fund is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  3,293  in Baron Discovery Fund on December 20, 2024 and sell it today you would lose (133.00) from holding Baron Discovery Fund or give up 4.04% of portfolio value over 90 days.

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

Baron Small Cap  vs.  Baron Discovery Fund

Baron Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Baron Small 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.

Baron Discovery

Risk-Adjusted Performance

Very Weak

Over the last 90 days Baron Discovery Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Baron Discovery is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Baron Small and Baron Discovery

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

The idea behind Baron Small Cap and Baron Discovery Fund 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.