Correlation Between Smallcap World and Balanced Strategy

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

Diversification Opportunities for Smallcap World and Balanced Strategy

0.62

Correlation Coefficient

Smallcap World  Balanced Strategy

Poor diversification

The 3 months correlation between Smallcap and Balanced is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Balanced Strategy Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Balanced Strategy 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 Balanced Strategy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Balanced Strategy has no effect on the direction of Smallcap World i.e., Smallcap World and Balanced Strategy go up and down completely randomly.

Pair Corralation between Smallcap World and Balanced Strategy

Assuming the 90 days horizon Smallcap World Fund is expected to under-perform the Balanced Strategy. In addition to that, Smallcap World is 1.84 times more volatile than Balanced Strategy Fund. It trades about -0.07 of its total potential returns per unit of risk. Balanced Strategy Fund is currently generating about 0.01 per unit of volatility. If you would invest  1,079  in Balanced Strategy Fund on December 22, 2024 and sell it today you would earn a total of  3.00  from holding Balanced Strategy Fund or generate 0.28% 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.  Balanced Strategy Fund

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 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.

Balanced Strategy

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Smallcap World Fund and Balanced Strategy 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.