Correlation Between Davidson Multi and Small Cap

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

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

Diversification Opportunities for Davidson Multi and Small Cap

0.94

Correlation Coefficient

Davidson Multi  Small Cap

Almost no diversification

The 3 months correlation between Davidson and Small is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Davidson Multi Cap Equity and Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Equity and Davidson Multi 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 Davidson Multi Cap Equity are associated (or correlated) with Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Equity has no effect on the direction of Davidson Multi i.e., Davidson Multi and Small Cap go up and down completely randomly.

Pair Corralation between Davidson Multi and Small Cap

Assuming the 90 days horizon Davidson Multi is expected to generate 1.27 times less return on investment than Small Cap. But when comparing it to its historical volatility, Davidson Multi Cap Equity is 1.96 times less risky than Small Cap. It trades about 0.14 of its potential returns per unit of risk. Small Cap Equity is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,779  in Small Cap Equity on September 12, 2024 and sell it today you would earn a total of  128.00  from holding Small Cap Equity or generate 7.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	98.44%
Values	Daily Returns

Davidson Multi Cap Equity  vs.  Small Cap Equity

Davidson Multi Cap

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Davidson Multi Cap Equity are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Davidson Multi is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Small Cap Equity

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Davidson Multi and Small Cap

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

The idea behind Davidson Multi Cap Equity and Small Cap 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.

Check out your portfolio center.

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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.