Correlation Between Capital Southwest and Ares Capital

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

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

Diversification Opportunities for Capital Southwest and Ares Capital

0.67

Correlation Coefficient

Capital Southwest  Ares Capital

Poor diversification

The 3 months correlation between Capital and Ares is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Capital Southwest and Ares Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ares Capital and Capital Southwest 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 Capital Southwest are associated (or correlated) with Ares Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ares Capital has no effect on the direction of Capital Southwest i.e., Capital Southwest and Ares Capital go up and down completely randomly.

Pair Corralation between Capital Southwest and Ares Capital

Given the investment horizon of 90 days Capital Southwest is expected to generate 0.94 times more return on investment than Ares Capital. However, Capital Southwest is 1.07 times less risky than Ares Capital. It trades about 0.09 of its potential returns per unit of risk. Ares Capital is currently generating about 0.05 per unit of risk. If you would invest  2,116  in Capital Southwest on December 28, 2024 and sell it today you would earn a total of  121.00  from holding Capital Southwest or generate 5.72% return on investment over 90 days.

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

Capital Southwest  vs.  Ares Capital

Capital Southwest

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Capital Southwest are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Capital Southwest is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Ares Capital

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Ares Capital are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Ares Capital is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Capital Southwest and Ares Capital

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

The idea behind Capital Southwest and Ares Capital 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.