Correlation Between Smallcap World and Pabrai Wagons

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

By analyzing existing cross correlation between Smallcap World Fund and Pabrai Wagons Institutional, you can compare the effects of market volatilities on Smallcap World and Pabrai Wagons 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 Smallcap World with a short position of Pabrai Wagons. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Pabrai Wagons.

Diversification Opportunities for Smallcap World and Pabrai Wagons

0.79

Correlation Coefficient

Smallcap World  Pabrai Wagons

Poor diversification

The 3 months correlation between Smallcap and Pabrai is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Pabrai Wagons Institutional in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pabrai Wagons Instit and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Pabrai Wagons. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pabrai Wagons Instit has no effect on the direction of Smallcap World i.e., Smallcap World and Pabrai Wagons go up and down completely randomly.

Pair Corralation between Smallcap World and Pabrai Wagons

Assuming the 90 days horizon Smallcap World Fund is expected to generate 0.86 times more return on investment than Pabrai Wagons. However, Smallcap World Fund is 1.17 times less risky than Pabrai Wagons. It trades about -0.07 of its potential returns per unit of risk. Pabrai Wagons Institutional is currently generating about -0.29 per unit of risk. If you would invest  6,670  in Smallcap World Fund on December 21, 2024 and sell it today you would lose (282.00) from holding Smallcap World Fund or give up 4.23% of portfolio value over 90 days.

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

Smallcap World Fund  vs.  Pabrai Wagons Institutional

Smallcap World

Risk-Adjusted Performance

Very Weak

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

Pabrai Wagons Instit

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pabrai Wagons Institutional has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Smallcap World and Pabrai Wagons

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

The idea behind Smallcap World Fund and Pabrai Wagons Institutional 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.