Correlation Between Capital Southwest and Hercules Capital

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

Diversification Opportunities for Capital Southwest and Hercules Capital

0.32

Correlation Coefficient

Capital Southwest  Hercules Capital

Weak diversification

The 3 months correlation between Capital and Hercules is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Capital Southwest and Hercules Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hercules 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 Hercules Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hercules Capital has no effect on the direction of Capital Southwest i.e., Capital Southwest and Hercules Capital go up and down completely randomly.

Pair Corralation between Capital Southwest and Hercules Capital

Given the investment horizon of 90 days Capital Southwest is expected to generate 1.58 times less return on investment than Hercules Capital. But when comparing it to its historical volatility, Capital Southwest is 1.31 times less risky than Hercules Capital. It trades about 0.07 of its potential returns per unit of risk. Hercules Capital is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,111  in Hercules Capital on October 3, 2024 and sell it today you would earn a total of  898.00  from holding Hercules Capital or generate 80.83% return on investment over 90 days.

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

Capital Southwest  vs.  Hercules Capital

Capital Southwest

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital Southwest has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Hercules Capital

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Hercules Capital are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Hercules Capital is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Capital Southwest and Hercules Capital

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

The idea behind Capital Southwest and Hercules 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.