Correlation Between Smallcap World and Gmo Global

Can any of the company-specific risk be diversified away by investing in both Smallcap World and Gmo Global 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 Gmo Global 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 Gmo Global Equity, you can compare the effects of market volatilities on Smallcap World and Gmo Global 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 Gmo Global. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Gmo Global.

Diversification Opportunities for Smallcap World and Gmo Global

0.71

Correlation Coefficient

Smallcap World  Gmo Global

Poor diversification

The 3 months correlation between Smallcap and Gmo is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Gmo Global Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gmo Global Equity 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 Gmo Global. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gmo Global Equity has no effect on the direction of Smallcap World i.e., Smallcap World and Gmo Global go up and down completely randomly.

Pair Corralation between Smallcap World and Gmo Global

Assuming the 90 days horizon Smallcap World is expected to generate 1.04 times less return on investment than Gmo Global. But when comparing it to its historical volatility, Smallcap World Fund is 2.27 times less risky than Gmo Global. It trades about 0.16 of its potential returns per unit of risk. Gmo Global Equity is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  2,824  in Gmo Global Equity on October 24, 2024 and sell it today you would earn a total of  68.00  from holding Gmo Global Equity or generate 2.41% return on investment over 90 days.

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

Smallcap World Fund  vs.  Gmo Global Equity

Smallcap World

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Smallcap World Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Smallcap World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Gmo Global Equity

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Gmo Global Equity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Gmo Global is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Smallcap World and Gmo Global

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

The idea behind Smallcap World Fund and Gmo Global Equity 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.